UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0547337
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3280 North Frontage Road, Lehi, Utah 84043
(Address of principal executive offices) (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
- ----------------------------- ----------------------------------
$.001 par value Common Stock 10,560,551 Shares of Common Stock
at August 5, 1998
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION (Unaudited).......................... 3
Consolidated Balance Sheets - As of June 30, 1998 and
September 30, 1997
Consolidated Statements of Operations - For the three months
ended June 30, 1998 and 1997 and for the nine months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows - For the nine months
ended June 30, 1998 and 1997
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 23
PART I - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................. 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 26
ITEM 5. OTHER INFORMATION......................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 26
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE................................... 28
Statements in this Form 10-Q, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors which
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in ITEM 2 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors.
2
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of As of
June 30, September 30,
1998 1997
----------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $3,352,585 $4,780,301
Receivables:
Trade Accounts 3,537,191 12,595
Binder Plant Sales 457,297 0
Stock Subscriptions 0 577,500
Inventories 1,272,549 1,818,991
Advances on inventories 2,203,868 1,086,964
Notes receivable - related parties, current 576,499 275,516
Prepaid expenses and other current assets 191,361 51,865
----------- -----------
Total current assets 11,591,350 8,603,732
----------- -----------
Property, plant and equipment, net of
accumulated depreciation 41,265,678 13,619,271
----------- -----------
Other assets:
Notes receivable 7,757,290 0
Notes receivable - related parties, non-current 3,471,334 3,816,604
Deposits and other assets 964,003 321,207
----------- -----------
Total other assets 12,192,627 4,137,811
----------- -----------
Total assets $65,049,655 $26,360,814
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
(continued)
3
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
As of As of
June 30, September 30,
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $973,534 $1,045,147
Payable for coal briquetting equipment 2,670,088 1,967,686
Due to related party 716,688 1,038,667
Accrued liabilities 871,164 1,023,126
Accrued contractor liability 954,000 1,477,000
Convertible debentures, current 0 3,302,422
Notes payable, current 14,436,417 1,945,104
----------- -----------
Total current liabilities 20,621,891 11,799,152
----------- -----------
Long-term liabilities:
Accrued interest 786,683 204,402
Notes payable, non-current 19,397,417 2,900,000
Notes payable - related parties, non-current 146,588 489,096
Deferred revenues from advance licensing fees 1,400,000 1,650,000
Deferred compensation 232,749 223,891
----------- -----------
Total long-term liabilities 21,963,437 5,467,389
----------- -----------
Total liabilities 42,585,328 17,266,541
----------- -----------
Minority interest in consolidated subsidiaries 2,845,142 3,165,996
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock: $0.001 par value; authorized
10,000,000 shares, issued and outstanding,
315,882 shares at June 30, 1998 and 303,024 shares
at September 30, 1997 316 303
Common stock: $0.001 par value; authorized 25,000,000
shares, issued and outstanding, 10,559,266 shares
at June 30, 1998 and 8,627,290 shares at
September 30, 1997 10,559 8,627
Common stock to be issued: 0 shares at June 30, 1998 and
462,285 shares at September 30, 1997 0 462
Capital in excess of par value - preferred 5,184,627 5,094,634
Capital in excess of par value - common 57,390,133 41,818,549
Capital in excess of par value - common stock to be issued 0 3,291,783
Accumulated deficit (30,762,064) (32,191,556)
Notes and interest receivable - related parties from issuance
of or collateralized by common stock (net of allowance) (8,221,736) (7,411,278)
Deferred compensation from stock options (3,982,650) (4,683,247)
----------- -----------
Total stockholders' equity 19,619,185 5,928,277
----------- -----------
Total liabilities and stockholders' equity $65,049,655 $26,360,814
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ----------- ---------- -----------
Revenues:
<S> <C> <C> <C> <C>
License fees $3,150,000 $0 $7,736,000 $0
Synthetic fuel sales 0 0 4,888 124,341
Returns on synthetic fuel sales 0 0 0 (82,500)
Binder sales 608,206 130,112 699,811 134,129
Binder plant sales 1,298,000 0 1,298,000 0
Coal fines 639,711 0 2,543,264 0
Operation and maintenance fees 3,795 0 70,072 0
---------- ----------- ---------- -----------
Total revenues 5,699,712 130,112 12,352,035 175,970
---------- ----------- ---------- -----------
Operating costs and expenses:
Cost of coal briquetting operations 1,436,549 390,224 2,509,971 1,139,916
Cost of binder plants 1,094,661 0 1,094,661 0
Cost of binder sales 416,373 0 530,150 0
Cost of coal fines 639,711 0 2,543,264 0
Research and development 80,690 92,856 308,583 263,319
Selling, general and administrative 1,111,170 1,015,585 3,002,572 2,285,922
Compensation related to stock options
and issuance of common stock 285,613 384,414 731,659 933,112
Loss (gain) on sale of assets 52,772 (299,822) (25,628) (295,626)
Write-down (write-up) of note
receivable - related parties,
collateralized by common stock (532,188) 143,750 (1,094,688) (150,000)
---------- ----------- ---------- -----------
Total operating costs and expenses 4,585,351 1,727,007 9,600,544 4,176,643
---------- ----------- ---------- -----------
Operating income (loss) 1,114,361 (1,596,895) 2,751,491 (4,000,673)
---------- ----------- ---------- -----------
Other income (expense):
Interest income 301,899 89,359 604,579 267,216
Interest expense 0 (418,501) (2,292,432) (2,052,969)
Minority interest in net losses (income)
of consolidated subsidiaries 182,976 (27,366) 320,854 333,304
Other income 15,000 15,438 45,000 19,891
---------- ----------- ---------- -----------
Total other income (expense) 499,875 (341,070) (1,321,999) (1,432,558)
---------- ----------- ---------- -----------
Net income (loss) $1,614,236 $(1,937,965) $1,429,492 $(5,433,231)
========== =========== ========== ===========
Earnings (loss) per share:
Basic $ 0.15 $ (0.24) $ 0.12 $ (0.69)
Diluted $ 0.12 $ (0.24) $ 0.12 $ (0.69)
========== =========== ========== ===========
Weighted average shares outstanding:
Basic 10,399,912 8,192,603 9,720,229 7,921,253
========== =========== ========== ===========
Diluted 13,087,997 8,192,603 12,379,757 7,921,253
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
ended ended
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $1,429,492 $(5,433,231)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Depreciation and amortization 312,295 176,253
Common stock issued for services 0 383,305
Write-up of note receivable - related parties (1,094,688) (150,000)
Interest expense based upon issuance of
convertible debt and warrants at a discount 2,265,543 1,428,571
Interest expense related to conversion inducement 0 323,000
Compensation related to stock options and
issuance of common stock 731,660 933,112
Interest earned on notes receivable - related
parties, collateralized by common stock 0 (60,414)
Loss (gain) on sale of equipment (25,628) 4,196
Minority interest in net losses of
consolidated subsidiaries (320,854) (360,626)
Increase (decrease) from changes in assets:
Receivables (3,524,596) (232,743)
Receivalbes - binder plants 457,297 0
Receivables - related parties 0 (79,540)
Inventories 546,442 (1,576,447)
Advances on inventory (1,116,904) (750,000)
Prepaid expenses and other current assets (139,496) (64,367)
Deposits and other assets (54,796) (97,966)
Accounts payable (71,613) 1,247,049
Due to related party, net (321,979) 0
Accrued liabilities 380,759 (199,097)
Accrued contractor liability (523,000) 0
Accrued interest 582,281 178,681
Note payable for inventory 768,500 0
Deferred compensation 8,858 156,850
Deferred revenue from advance license fees (250,000) 1,400,000
------------- -------------
Net cash used in operating activities (875,021) (2,773,414)
------------- -------------
Cash flows from investing activities:
Cash paid for property, plant and equipment (33,715,521) (6,580,171)
Issuance of notes receivable (1,257,290) (49,456)
Deposits collaterizing letters of credit (588,000) 0
Proceeds from notes receivable 0 129,464
Proceeds from notes receivable - related party 44,287 31,608
------------- -------------
Net cash used in investing activities (35,516,524) (6,468,555)
------------- -------------
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
ended ended
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from financing activities:
<S> <C> <C>
Proceeds from issuance of limited partnership
interests in subsidiaries 0 350,000
Distributions to limited partnership
interests in subsidiaries 0 (292,000)
Proceeds from notes payable 32,569,785 6,597,493
Proceeds from notes payable - related party 0 109,470
Payments on notes payable (5,794) (317,573)
Payments on notes payable - related parties (342,508) (73,683)
Proceeds from notes receivable - related parties,
collateralized by common stock 314,079 106,000
Proceeds from issuance of preferred stock, (net) 90,006 0
Proceeds from issuance of common stock (net) 1,760,761 2,674,023
Proceeds from receivable - stock subscriptions 577,500 0
------------- -------------
Net cash provided by financing activities 34,963,829 9,153,730
------------- -------------
Net decrease in cash (1,427,716) (88,239)
Total cash and cash equivalents, beginning of period 4,780,301 490,106
------------- -------------
Total cash and cash equivalents, end of period $3,352,585 $401,867
============= =============
Supplemental schedule of noncash investing and
financing activities:
Payable for briquetting facility $ 702,402 $0
Common stock issued on conversion of notes payable 7,686,473 1,263,530
Common stock issued for notes receivable - related
party collateralized by common stock 45,000 0
Notes receivable issued for sale of briquetting
facility 6,500,000 3,500,000
Accrued interest refinanced in notes payable 40,290 0
Notes payable that were refinanced 1,999,719 0
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
(continued)
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management Opinion
In the opinion of management, the accompanying financial statements present
fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the
"Company") as of June 30, 1998 and September 30, 1997, the results of its
operations for the three months and nine months ended June 30, 1998 and June 30,
1997 and its cash flows for the nine months ended June 30, 1998 and June 30,
1997. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's Annual Report included on Form 10-K
for the year ended September 30, 1997 and the Company's Quarterly Report
included on Form 10-Q for the quarters ended December 31, 1997 and March 31,
1998.
2. Earnings/Loss Per Share Calculation
During fiscal 1998 the Company adopted SFAS No. 128 "Earnings Per Share." Basic
earnings (loss) per share is computed based upon the weighted average number of
common shares outstanding. The computation of diluted earnings per common share
includes contingent issuances of securities that would have a dilutive effect on
earnings per share. Contingent issuances were antidilutive in each period for
which a net loss was reported; therefore, the amounts reported for basic and
diluted loss per share are the same for those periods. See Note 9.
3. Inventories and Advances on Inventories
Inventories and advances on inventories are stated at the lower of average cost
or market, and consist of synthetic fuel, binder materials, and coal fines.
4. Change in Estimate of Fair Value of Note Receivable
During the three and nine months ended June 30, 1998, the Company decreased the
allowance on the $5,000,000 face value note receivable from a stockholder
received from the sale of certain construction companies by $532,188 and
$1,094,688, respectively, to an adjusted loan value of $2,684,688 as of June
30,1998. During the three and nine months ended June 30, 1997, the Company
increased and decreased the allowance by $(143,750) and $150,000, respectively.
The note is guaranteed by the buyer, who is the sole shareholder of the
construction companies, and 150,000 shares of common stock of the Company owned
by the buyer that are held as collateral by the Company. The changes in the
allowance were based solely on changes in the market value of the Company's
common stock held as collateral for the note receivable. The allowance is
subject to future fluctuations in the Company's common stock.
5. Notes Receivable
On November 14, 1997, the Company entered into a financial agreement with CoBon
Energy, L.L.C.("CoBon"), relating to the purchase of equipment for a synthetic
fuel production facility. The original agreement provided that the Company would
purchase, on CoBon's behalf, up to $1 million worth of equipment for use in the
facility. Subsequently, the maximum amount of the financing was increased to
approximately $1,400,000 to provide for additional borrowings by CoBon. As
consideration for the loan, the Company received the rights to certain royalties
generated from the operation of the facility. The Company paid $812,290 for
equipment and loaned CoBon $445,000, bringing the total note receivable to
$1,257,290 as of June 30, 1998. Subsequent to June 30, 1998, the Company and
CoBon agreed that for amounts advanced on equipment and amounts loaned by the
Company, CoBon would 1) pay $660,000 to the Company in equal amounts over the
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Notes Receivable, continued
period beginning July 1, 1999 and ending September 30, 2002, 2) pay $257,250 to
the Company and 3) pay to the Company $0.10 cents for every dollar of income tax
credit generated by the synthetic fuel facility.
On February 20, 1998, Alabama Synfuel #1, Ltd.(AS#1), a subsidiary of the
Company, sold a briquetting facility located in Alabama ("Alabama Plant") to
Birmingham Synfuel, L.L.C., a wholly-owned subsidiary of PacifiCorp. The
purchase price was $6,500,000 and resulted in a gain of approximately $78,000.
The purchase price was paid with a note receivable that bears interest at 12%
and is to be repaid in equal consecutive quarterly installments, subject to
certain provisions and limitations, including the net operating cash flow from
the Alabama Plant. All accrued interest and unpaid principal is due and payable
on February 20, 2003.
6. Advance on Binder Facilities
During the quarter ended June 30, 1998, the Company applied advances of $790,703
received as of March 31, 1998 from A.T. Massey, PacifiCorp, and CoBon for binder
plants under construction against amounts billed in connection with the sale of
these binder plants to the licensees.
7. Notes Payable and Convertible Debentures
A.J.G. Financial Services, Inc.
During October 1997, the Company entered into an agreement with A.J.G. Financial
Services, Inc. ("AJG") to provide financing of approximately $4,300,000 for the
building of a coal wash plant at an interest rate of 6%. In addition, the
Company granted warrants in an amount equal to 10% of the amount financed. Half
of these warrants have a strike price of $10 and half have a strike price of
$20. Based upon the market price of the Company's common stock on the date of
the agreement, $398,222 of interest expense was recognized due to issuance of
the $10 warrants. As of June 30, 1998, the Company had borrowed $4,325,433 under
this arrangement. Principal and interest are due 2 years from the date the debt
was incurred. The Company began start-up testing of the wash plant during April
1998 and began normal operation of the plant in June 1998.
During the quarter ended March 31, 1998, the Company entered into an additional
agreement with AJG to borrow up to $6.5 million at an interest rate of 6% per
annum to be used for construction of a briquetting facility located in West
Virginia. As of June 30, 1998 the Company had received $6,680,000 under this
borrowing arrangement. In July 1998, the Company repaid $180,000 under this
arrangement to bring the net borrowings to $6.5 million under this agreement.
50% of the accrued interest is due February 1999 with the balance of accrued
interest and principal due in full in February 2001. The loan is collateralized
by the synthetic fuel facility constructed with the proceeds and by certain
earned license fees that may be payable to the Company from synthetic fuel
facilities constructed by AJG.
PacifiCorp Financial Services, Inc.
During December 1997, the Company executed a Convertible Loan and Security
Agreement with PacifiCorp Financial Services, Inc. ("PFS"). The agreement
modifies an agreement finalized on March 20, 1997 which provides funding for
completing construction of the Alabama project, acquiring coal fines and for
other purposes related to the project. The modification increased the amount
available from $5,000,000 to $7,000,000 with a provision that borrowings up to
the lesser of actual borrowings or $6,000,000 are convertible into common stock
under the same terms as the original March 20, 1997 agreement (at a price of
$7.00 per share). Based upon the December 1997 amendment, an interest expense of
$714,286 was recognized during the quarter ended December 31, 1997 because the
conversion price is below the market price.
9
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Notes Payable and Convertible Debentures, continued
PacifiCorp Financial Services, Inc., continued
Effective March 3, 1998, PFS exercised their option to convert all outstanding
borrowings under this arrangement into 1 million shares of common stock.. The
conversion of the borrowings in excess of $6,000,000 resulted in an additional
interest charge of $714,285 during the quarter ending March 31, 1998 because the
conversion price is below the market price. In addition, the Company issued
27,000 shares of common stock to PFS under the antidilution provisions of its
conversion agreement. This resulted in the issuance of additional common stock
with a value of approximately $220,000. This amount was charged to interest
expense during the quarter ended March 31, 1998.
DTE Energy Services, Inc.
In October 1997, the Company entered into a financial agreement with DTE Energy
Services, Inc. ("DTE") relating to the purchase of equipment for up to two
synthetic fuel production facilities. The agreement allowed for borrowings up to
$2,000,000 with interest at LIBOR plus 1.0%. The Company borrowed $1,999,719
under the agreement. These borrowings were repaid in full during May 1998.
Trans Pacific Stores
On March 17, 1998, the Company entered into a loan agreement with Trans Pacific
Stores, Ltd. ("TPS") wherein TPS agreed to loan the Company up to $4,000,000.
The loan is collateralized by future earned license fees payable to the Company
from the synthetic fuel manufacturing facilities constructed by Pace Carbon
Fuels, LLC. Interest on the outstanding principal balance accrues at twelve
percent (12%) per annum. The interest rate is adjusted to thirteen percent (13%)
on September 20, 1998 and to fourteen percent (14%) on December 20, 1998. Each
time the interest rate is adjusted, a one percent (1%) renewal fee of $40,000 is
due and payable. Interest on the unused portion of the borrowing will accrue
interest at one percent (1%) per annum until the loan is paid in full. The
outstanding principal and interest is due in full before March 20, 1999. As of
June 30, 1998, the full $4 million had been borrowed under this arrangement.
On June 12, 1998, the Company entered into an additional loan agreement with
Trans Pacific Stores, Ltd. wherein TPS agreed to loan the Company up to
$4,000,000. Collateral for the first $2,200,000 of borrowings under this note is
a continuing interest in the promissory note as amended August 26, 1996 received
by the Company in connection with the sale of certain construction companies;
collateral for borrowings for the next $1,800,000 is a continuing interest in
future cash flows payable to the Company pursuant to an agreement between A.T.
Massey ("Massey") and the Company dated December 4, 1997. Interest on the
outstanding principal balance accrues at eighteen percent (18%) per annum. On
the four-month anniversary of this note, the interest rate shall be adjusted to
twenty-two percent (22%) per annum, until the loan has been paid in full. All
principal and interest is due and payable on or before twelve months following
execution of this note. TPS could also be granted warrants to purchase up to
100,000 shares of restricted common stock of the Company in an amount equal to
100,000 multiplied by the quotient of the outstanding borrowings divided by
$4,000,000, at an exercise price equal to the closing bid price on the
four-month anniversary of the loan. Warrants granted, if any, may be exercised
within two years of the date of issuance. As of June 30, 1998, $2,000,000 had
been borrowed under this arrangement. A member of the Company's Board of
Directors is affiliated with TPS.
(continued)
10
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Notes Payable and Convertible Debentures, continued
Fun Enterprises
On January 29, 1998, the Company entered into a loan and security agreement with
Fun Enterprises, Pty Ltd. ("Fun"), a current holder of the Company's Class B
preferred stock, relating to the development and construction of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern coal company. The agreement allows the Company to borrow up to
$5,800,000. The loan is secured by the synthetic fuel facility. The interest
rate will be 12% per annum until August 31, 1998, and 15% per annum thereafter
until paid in full. Fun will also have the right to receive certain royalties
after the facility is sold. As of June 30, 1998 the Company has drawn $5,666,363
on the loan. The loan is due in full at the earlier of the sale of the facility
or August 31, 1999.
Mountaineer Synfuel, L.L.C.
On May 5, 1998, the Company entered into an Asset Purchase Agreement
("Agreement") with Mountaineer Synfuel, L.L.C.("Mountaineer"), wherein the
Company agreed to sell to Mountaineer a synthetic fuel facility located in West
Virginia upon the occurrence of certain future events. In connection with this
Agreement, Mountaineer agreed to loan the Company up to $8,500,000 to be used
for the construction and working capital requirements of the facility. Amounts
loaned are to be repaid upon the earlier of the Closing Date of the purchase or
January 1, 1999. As of June 30, 1998, $8,250,000 had been received under this
Agreement, of which $8,250 came from the Company as the owner of a .1%
membership interest in Mountaineer.
Convertible Subordinated Debentures
In November 1996, the Company issued convertible subordinated debentures
totaling $1,000,000. The debentures accrue interest at prime rate plus 2% with
principal and interest payable in full on June 30, 1998. The debentures and
accrued interest are convertible into common stock of the Company at $11.00 per
share. On June 30, 1998 the $1,000,000 of debentures together with the accrued
interest of $178,904 were converted into 107,174 shares of common stock.
11
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Notes Payable and Convertible Debentures, continued
The following is a table summarizing notes payable and convertible debentures
previously discussed.
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
<S> <C> <C>
Note payable to a corporation, bearing interest at 6% collateralized by plant
and equipment. Principal and interest due October 1999 $ 4,325,433 $ 1,057,849
Note payable to a corporation, bearing interest at 6%. 50% of accrued interest
due in February 1999 and balance of accrued interest and principal due in
February 2001 6,680,000 -
Note payable to a corporation bearing interest at prime (8.5% at June 30, 1998)
plus 2%, net. Collateralized by plant and equipment. Principal and interest due
December 20, 1999 2,825,681 2,787,255
Convertible note payable to a corporation, bearing interest at prime (8.50% at
June 30, 1998) plus 2%. Collateralized by plant, equipment and coal fines. Loan
of $6,686,473 plus accrued interest of $313,527 converted to common stock March
20, 1998. - 3,302,422
Note payable to a corporation bearing interest at 18% for the first four months
then adjusted to 22% thereafter collateralized by a certain promissory note and
by certain future earned license fees. If unpaid after four months, warrants are
to be granted based on outstanding balances. Amounts are due on or before June
12, 1999. 2,000,000 -
Note payable to a corporation. Interest on the outstanding principal balance
accrues at twelve percent (12%) per annum. The interest rate is adjusted to
thirteen percent (13%) on September 20, 1998 and to fourteen percent (14%) on
December 20, 1998. The balance and accrued interest is due in full before March
20, 1999 and is collateralized by certain future earned license fees. 4,000,300 -
Note payable to a corporation bearing interest at 12% per annum until August 31,
1998, and 15% per annum thereafter until paid collateralized by a synthetic fuel
facility. The loan is due in full at the earlier of the sale of the facility or
August 31, 1999 5,666,363 -
Note payable to a limited liability company issued in conjunction with the
construction of a synthetic fuel facility. The loan is due in full at the
earlier of the sale of the facility or January 1, 1999. 8,241,750 -
Other 94,307 -
Convertible debentures to two individuals and one trust, bearing interest at
prime (8.5% at March 31, 1998) plus 2%. Principal and interest due June 30,
1998. Convertible at $11.00 per share. Converted to common stock June 30, 1998. - 1,000,000
------------- -------------
$33,833,834 $8,147,526
Less: current portion (14,436,417) (5,247,526)
Total non-current ------------- -------------
$19,397,417 $2,900,000
============= =============
</TABLE>
12
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Stockholders' Equity
The table below presents the activity in stockholders'
equity from April 1, 1998 through June 30, 1998.
<TABLE>
<CAPTION>
Notes and
interest
receivable
-related
parties
from
issuance
of, or Deferred
Preferred Stock Common Stock Common Stock to be issued collater- compen-
Capital in Capital in Capital in alized sation
excess of excess of excess of Accumulated by, common on stock
Shares Amount par value Shares Amount par value Shares Amount par value Deficit stock options
------ ------ --------- ------ ------ --------- ------ ------ --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1998 315,882 $316 $5,184,627 10,256,175 $10,256 $55,104,727 63,060 $63 $417,638 ($32,376,300)($7,701,798)($4,268,263)
Common stock
issued for
cash from
exercise of
stock options 195,917 196 1,106,609 (63,060) (63) (417,638)
Conversion of
notes payable 107,174 107 1,178,797
Cash received in
payment on
notes receivable
- - related
parties from
issuance of
common stock 12,250
Amortization of
deferred
compensation on
stock options 285,613
Write-up of note
receivable -
related parties (532,188)
Net income for
the quarter
ended June
30, 1998 1,614,236
------- ---- ---------- ---------- ------- ----------- ------ --- -------- ------------ ---------- ----------
Balance at
June 30, 1998 315,882 $316 $5,184,627 10,559,266 $10,559 $57,390,133 0 $0 $ 0 ($30,762,064)($8,221,736)($3,982,650)
======= ==== ========== ========== ======= =========== ====== === ======== =========== ========== ==========
</TABLE>
13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Computation of Earnings (Loss) Per Share (EPS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, 1998 June 30, 1998
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net Income (loss) - diluted EPS $ 1,614,236 $ 1,614,236 $ 1,429,492 $ 1,429,492
Preferred stock dividends accrued (84,683) (279,562)
Net income (loss) - basic EPS $ 1,529,553 $ 1,149,930
Number of common shares outstanding 10,559,266 10,559,266 10,559,266 10,559,266
Effect of using weighted average common
shares outstanding (159,354) (159,354) (839,037) (839,037)
Weighted average number of common shares
outstanding
(basic earnings per share) 10,399,912 10,399,912 9,720,229 9,720,229
Dilutive effect:
Common stock options 1,291,825 1,274,258
Common stock warrants 654,807 643,817
Convertible preferred stock 741,453 741,453
Dilutive weighted average number of common
shares outstanding 13,087,997 12,379,757
</TABLE>
Options to purchase 2,340,250 shares of common stock at prices between $1.50 and
$13.56 per share were outstanding during the third quarter of fiscal 1998 and
were included in the computation of diluted EPS. For the quarter ended June 30,
1997, these options were not included in the computation of loss per share
because any effect would have been antidilutive.
Warrants to purchase 1,967,260 shares of common stock at prices between $7.00
and $30.00 per share were outstanding during the third quarter of fiscal 1998
and warrants with an exercise price of $15.75 or less were included in the
computation of diluted EPS. For the quarter ended June 30, 1997, warrants were
not included in the computation of loss per share because any effect would have
been antidilutive.
Convertible debt of $1,000,000 was converted into 107,174 shares of common stock
during the third quarter of fiscal 1998. For the quarter ended June 30, 1997,
convertible debt was not included in the computation of loss per share because
any effect would have been antidilutive.
Preferred stock convertible into 741,453 shares of common stock at the price of
$7.00 per share were outstanding during the third quarter of fiscal 1998 and
were included in the computation of diluted EPS.
14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Commitments and Contingencies
During 1996, the Company or its licensees entered into thirty contracts for the
construction of manufacturing facilities that would use the Company's
proprietary Briquetting Technology in the conversion of coal fines into
synthetic fuel. All of these construction contracts contain penalties if the
contracting party fails to proceed with the construction of these facilities.
Fifteen of these construction contracts were entered into by independent third
parties and the Company was not a party. Accordingly, no liability for failing
to proceed exists with these contracts. Four contracts were entered into jointly
by the Company and its joint venture partners. The remaining eleven are the
Company contracts. Of the contracts for which the Company has liability or
shared liability there are two joint venture facilities that will not be
constructed and there are three contracts where the facilities may not be
constructed. As of September 30, 1997, the Company accrued a liability of
$1,477,000 for these potential penalties. During the first nine months ended
June 30, 1998, the Company paid penalties in the amount of $205,000 and reversed
$318,000 for a construction contract where the project was constructed.
Accordingly, as of June 30, 1998, the remaining accrued contractor liability is
$954,000.
In December 1996, the Company entered into six indemnification agreements in
connection with six of the construction contracts entered into by independent
third parties. These contracts contain liquidating damages of $750,000 per
contract if construction of the facilities is not completed by June 1, 1998. The
Company has indemnified the contractor for these potential liabilities. The
contracting party has decided not to construct three of these facilities.
Accordingly, the Company believes the maximum contingent liability under these
indemnification agreements is $2,250,000. As of the date of the current filing,
the other three facilities were mechanically complete and operational. The
Company believes that payment of this liability is unlikely and has, therefore,
not recorded a liability for these potential penalties.
The Company entered into a letter of intent with Innovative Technologies
("Innovative") in July of 1995 to apply the Company's Briquetting Technology to
certain metallic ores supplied by Innovative. The Company conducted numerous
tests of the ore through the fall of 1995, and concluded from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997, Innovative Holding Company, Inc.,
filed a civil complaint against the Company alleging breach of the letter of
intent in the amount $500,000 plus damages. This case is currently in trial. The
Company is vigorously defending the suit and believes that it will be successful
in such defense.
During June 1998, the Company entered into an agreement with a bank that
provides for the issuance of letters-of-credit in an amount up to $700,000. As
of June 30, 1998 there were $440,000 of letters-of-credit issued and outstanding
under the agreement. The Company has $350,000 on deposit with this bank that is
held as collateral for these letters-of-credit and is included in deposits and
other assets in the accompanying balance sheet.
On April 21, 1998 the Company entered into separate loan agreements with each of
Carbon Resources and C.C. Pace Capital, L.L.C. (the "Borrowers"), to lend, in
quarterly installments, up to an aggregate principal amount not to exceed
$14,250,000 each during the period from and including November 1, 1998 to and
including February 1, 2008. The Company has agreed to make the initial advance
on November 1, 1998 in the amount of $375,000, or such other amounts as provided
for in the loan agreement, and thereafter on the first day of each February,
May, August and November during the loan period. Interest accrues on the
principal amount of the loan outstanding at a simple annual rate of six percent
(6%). Repayment of the loan shall be paid from amounts, if any, distributed to
the Borrowers by the General Partner of Pace Carbon Synfuels, L.P., which owns
100% of the memberships in the Project Companies discussed in the following
paragraph.
15
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Commitments and Contingencies, continued
The Company also entered into Amended and Restated License and Binder Purchase
Agreements with each of PC Virginia Synthetic Fuel #1, L.L.C., PC West Virginia
Synthetic Fuel #1, L.L.C., PC West Virginia Synthetic Fuel #2, L.L.C., and PC
West Virginia Synthetic Fuel #3, L.L.C., (collectively the "Project Companies")
as of February 3, 1998. The Company is entitled to receive royalties under the
terms and as described in the Licensing Agreements. The Licensing Agreements
provide for a one-time advance license fee and earned royalty on a quarterly
basis at a prescribed amount multiplied by the MM btu content per ton of each
product.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three months ended June 30, 1998 compared to the three months ended June 30,
1997
Revenues. For the quarter ended June 30, 1998, total revenues increased
by $5,569,590 to $5,699,712 from $130,112 reported for the quarter ended June
30, 1997. There were $3,150,000 in advance license fees reported during the
quarter ended June 30, 1998 while no license fees were recognized during the
quarter ended June 30, 1997. Advance license fees are normally due when
construction of the related briquetting facility begins, when construction is
completed, or when certain construction milestones or other conditions are met.
Advance license fees recognized during the quarter ended June 30, 1998 related
to four technology licensees covering ten synthetic fuel facilities or
production lines which became operational in June 1998. The Company had binder
sales in the amount of $608,206 for the quarter ended June 30, 1998 as compared
to $130,122 for sales that were made in the quarter ended June 30, 1997. The
Company expects binder sales to increase proportionate to future synthetic fuel
production and sales increases. The Company recieved revenues from binder plant
sales of $1,298,000 during the quarter ended June 30, 1998 while no such sales
occured during the same period ending June 30, 1997. These revenues resulted
from the sale of seven binder plants. The Company received revenues from the
sale of coal fines in the amount of $639,711 for the quarter ended June 30, 1998
under an agreement to sell the coal fines at their cost. The Company had
revenues from operation and maintenance fees of $3,795 for the quarter ended
June 30, 1998 and no such fees for the corresponding period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased
$2,858,344 to $4,585,351 for the quarter ended June 30, 1998 from $1,727,007
reported for the quarter ended June 30, 1997. Operating costs and expenses
attributable to the briquetting operations increased $2,557,359 to $2,947,583
for the quarter ended June 30, 1998 from $390,224 for the quarter ended June 30,
1997. The increase in briquetting operations costs for the quarter ended June
30, 1998 was a direct result of increased activities related to the completion
of construction of synthetic fuel facilities, increased activities related to
the refinement of the briquetting process and issues related to the
implementation of the Company's technology as production at the twenty-four
facilities commenced. Utah Synfuel #1, a Delaware limited partnership ("US #1"),
and the Company sold a synthetic fuel facility at Price, Utah ("Utah Plant"), to
Coaltech. In connection with the sale, US #1 entered into an agreement to
purchase all synthetic fuel production at the Utah Plant for costs incurred plus
$1 per ton. The Utah Plant has incurred significant costs for coal fines,
including the costs to wash the fines, and manufacturing costs as it works
through various production issues. These costs are included in the cost of coal
briquetting operations. It is anticipated that the sales price of the synthetic
fuel purchased by US#1 will be significantly less than its cost. As the wash
plant and synthetic fuel facility move towards normal operational levels and
efficiencies, the Company anticipates that the costs incurred per ton for the
synthetic fuel produced will be more in line with the sales price of the
synthetic fuel and will reduce the net operating loss currently resulting from
these operations. During the quarter ended June 30, 1998 the Company incurred
$639,711 in cost of coal fines sold under the arrangement discussed in the
previous paragraph.
Research and development costs decreased $12,166 during the quarter
ended June 30, 1998 from $92,856 for the quarter ended June 30, 1997. This
decrease is primarily due to the reduction in use of outside professional
services. The Company expects continued research and development costs in its
ongoing efforts to refine further the Company's synthetic fuel technology and in
pursuing other applications of this technology.
Selling, general and administrative expense increased $95,585 to
$1,111,170 for the quarter ended June 30, 1998 from $1,015,585 for the quarter
ended June 30, 1997. The increase relates to necessary personnel increases,
increased outside professional services relative to facility construction,
increased travel and related out-of-town expenses incurred to monitor
construction and start-up operations at the numerous facility locations, and
17
<PAGE>
general infrastructure cost increases as the Company continues to grow and
expand, and partially offset by a decrease resulting from a $342,805 expense
incurred in 1997 relating to stock issued in settlement of certain claims.
For the quarter ended June 30, 1998, the total operating expense
increase was partially offset by a decrease in compensation expense resulting
from the issuance of stock and stock options as compared to the quarter ended
June 30, 1997. The decrease of $98,801 is attributable to a reduction in the use
of stock and stock options in compensating employees and consultants of the
Company and to the general change in the Company philosophy regarding the strike
price for options granted. Generally, stock options that will be granted by the
Company in the future are not expected to be "in-the-money" at the date of
grant.
In fiscal 1996, the Company was required, under generally accepted
accounting principles, to adjust the $5 Million 6% promissory note (the "Note")
from the sale of Industrial Management and Engineering, Inc., State
Incorporated, Central Industrial Construction, Inc. and Larson Limestone
Company, Inc. (the "Construction Companies") to the most ascertainable value of
collateral held in support of the loan which was the Company's common stock. For
the quarter ended June 30, 1998, this adjustment resulted in a write-up of the
Note by $532,188 compared to a write-down of $143,750 for the quarter ended June
30, 1997. The Note is guaranteed by the buyer, sole shareholder of the
Construction Companies, and there has been no event of default or incurrance of
past due payments on the Note. The Company currently has no reason to believe
that the payments under the terms of the Note will not be made when due.
Total Other Income and Expenses. For the quarter ended June 30, 1998,
the Company had other income totaling $499,875. For the quarter ended June 30,
1997, the Company had other income totaling $104,797 and other expenses of
$445,867 for net other expenses totaling $341,070. This decrease of $840,945
consisted principally of a decrease in interest expense of $418,501 which
resulted from the issuance of convertible debt where the conversion price was
"in-the-money" during the quarter ended June 30, 1997 and an increase in
interest income of $212,540 during the quarter ended June 30, 1998. The minority
interest in the net losses of the consolidated subsidiaries increased by
$210,342 as a result of increased net losses of US # 1 and AS #1 during the
quarter ended June 30, 1998 as compared to the comparable period in 1997.
The Company has net operating loss carryforwards that are available to
offset future taxable income. Because the Company has not generated significant
taxable income relating to the Briquetting Technology net income, no benefit has
been recorded relative to the future utilization of the net operating loss
carryforwards. This benefit may be recorded in the near term if the Company
continues to realize taxable income.
Net Income. For the quarter ended June 30, 1998, the Company had net
income of $1,614,236 as compared with a net loss of $1,937,965 for the quarter
ended June 30, 1997. As discussed previously, this increase resulted primarily
from a significant increase in total revenues and other income, partially offset
by a significant increase in operating costs and expenses.
Amended Form 10-Q. All financial information for the quarter ended and
the nine months ended June 30, 1997 and comparisons between that period and the
corresponding period in 1998 are based upon the restated financial statements
filed in the Company's Form 10-Q/A, Amendment No. 1 for the period ended June
30, 1997 as filed on August 12, 1998.
Results of Operations
Nine months ended June 30, 1998 compared to the nine months ended June 30, 1997
Revenues. For the nine months ended June 30, 1998, total revenues
increased by $12,176,065 to $12,352,035 from $175,970 for the nine months ended
June 30, 1997. There were $7,736,000 in advance license fees received during the
nine months ended June 30, 1998 while no license fees were received during the
18
<PAGE>
comparable period during 1997. Advance license fees are normally due when
construction of the related briquetting facility begins, when construction is
completed, or when certain construction milestones or other conditions are met.
The Utah Plant was placed in service in early 1997. However, production
and sales of synthetic fuel were significantly curtailed due to the high levels
of ash content in feedstock used for production. To remedy the problem of ash
content, the Company constructed a wash plant for the Utah Plant that became
operational during the quarter ended June 30, 1998. The wash plant continues to
undergo operational inprovements and modifications and has not yet reached
expected output capacity. Accordingly, synthetic fuel sales of $4,888 during the
nine months ended June 30, 1998 were less than the sales of $124,341 during the
corresponding period ended June 30, 1997. The Company believes that as the wash
plant reaches operational capacity, it will be able to supply sufficient quality
coal fines to the Utah Plant to allow the plant to operate profitably at or near
capacity. The Company has had various discussions with potential end-users of
the synthetic fuel product. However, there is currently no contract in place for
the purchase of the synthetic fuel produced at the Utah Plant. The Company had
binder sales in the amount of $699,811 for the nine months ended June 30, 1998
as compared to sales of $134,129 during the nine months ended June 30, 1997. The
Company expects binder sales to increase proportionate to future synthetic fuel
production and sales increases. The Company received an additional $1,298,000
from binder plant sales for the quarter ended June 30, 1998; no such revenue was
received for the same period ending June 30, 1997. The Company received revenues
from the sale of coal fines in the amount of $2,543,264 for the nine months
ended June 30, 1998 under an agreement to sell the coal fines at their cost and
had operation and maintenance fees of $70,072 for the nine months ended June 30,
1998 and no such fees for the corresponding period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased
$5,423,901 to $9,600,544 for the nine months ended June 30, 1998 from $4,176,643
for the nine months ended June 30, 1997. Operating costs and expenses
attributable to the briquetting operations increased $2,994,866 to $4,134,782
for the nine months ended June 30, 1998 from $1,139,916 for the nine months
ended June 30, 1997. The increase in briquetting operations costs for the nine
months ended June 30, 1998 was a direct result of increased activities related
to the completion of construction of synthetic fuel facilities, increased
activities related to the refinement of the briquetting process and issues
related to the implementation of the Company's technology as production at the
twenty-four facilities commenced. During the nine months ended June 30, 1998 the
Company incurred $2,543,264 in costs for coal fines sold under the arrangement
previously discussed.
Research and development costs increased 17.2% to $308,583 during the
nine months ended June 30, 1998 from $263,319 for the nine months ended June 30,
1997. The Company expects continued research and development costs in its
ongoing efforts to refine further the Company's synthetic fuel technology and in
pursuing other applications of this technology.
Selling, general and administrative expense increased $716,650 or 31.4%
to $3,002,571 for the nine months ended June 30, 1998 from $2,285,922 for the
nine months ended June 30, 1997. The increase relates to necessary personnel
increases, increased outside professional services relative to facility
construction, increased travel and related out-of-town expenses incurred to
monitor construction and start-up operations at the numerous facility locations,
and general infrastructure cost increases as the Company continues to grow and
expand to meet operational needs.
For the nine months ended June 30, 1998, compensation expense resulting
from the issuance of stock and stock options decreased by $201,453 as compared
to the nine months ended June 30, 1997. The decrease is attributable to the
reduction in the use of stock and stock options in compensating employees and
consultants of the Company. The reduction is also reflective of a general change
in the Company's philosophy regarding the strike price for options granted.
Generally, stock options that will be granted by the Company in the future are
not expected to be "in-the-money" at the date of grant.
For the nine months ended June 30, 1998, the adjustment relative to the
note received from the sale of the Construction Companies resulted in a write-up
of the Note by $1,094,688 compared to a write-up of $150,000 for the nine months
ended June 30, 1997. The Note is guaranteed by the Buyer of the Construction
Companies and there has been no event of default or past due payment on the
Note.
19
<PAGE>
The Company currently has no reason to believe that the payments under the terms
of the Note will not be made when due.
Total Other Income and Expenses. For the nine months ended June 30,
1998, the Company had other income totaling $970,433 and interest expense of
$2,292,432 for net other expenses of $1,321,999. For the nine months ended June
30, 1997, the Company had other income totaling $620,411 and interest expense of
$2,052,969 for net other expenses of $1,432,558. This decrease in net other
expenses of $110,559 consisted principally of an increase in interest expense of
$239,736 resulting from the issuance of convertible debt where the conversion
price was "in-the-money", and an increase in interest income of $337,363.
Net Income. For the nine months ended June 30, 1998, the Company had
net income of $1,429,492 as compared with a net loss of $5,433,231 for the nine
months ended June 30, 1997 resulting in a net increase of $6,862,723.
Liquidity and Capital Resources
For the nine months ended June 30, 1998, management believes the
Company made significant progress in its movement from continued development and
refinement of the Company's proprietary technology to commercial operations. The
decrease in cash used by the Company in operating activities of $2,648,826 for
the nine months ended June 30, 1998 to $124,588 from $2,773,414 for the nine
months ended June 30, 1997 was largely due to the net income of $1,429,492
realized for the nine months ended June 30, 1998 compared to the net loss of
$5,433,231 for the nine months ended June 30, 1997. This significant improvement
in funds provided by operations was offset by increases in accounts and notes
receivable, inventories and a decrease in accounts payable.
The Company made cash payments for property, plant and equipment
totaling $34,240,955 during the nine months ended June 30, 1998. These additions
related to the wash plant at the Utah Plant, construction of four synthetic fuel
facilities and other miscellaneous purchases. The Company is currently pursuing
the sale of the four synthetic fuel facilities. This investment was funded by
cash available at September 30, 1997, proceeds from borrowings of $32,569,785
and proceeds from issuances of stock of $1,850,767. The Company believes it will
be able to meet future cash flow needs through additional borrowings, issuances
of equity securities, and from cash generated by operations.
During December 1997, the Company executed an amendment to the
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS"). The agreement modifies an agreement reached on March 20, 1997 which
provides funding for completing construction of the Alabama Plant and acquiring
coal fines and for other purposes related to the project. The modification
increased the amount available from $5,000,000 to $7,000,000 with a provision
that borrowings up to the lesser of actual borrowings or $6,000,000 are
convertible into common stock under the same terms as the original March 20,
1997 agreement (at a price of $7.00 per share). As of March 3, 1998, PacifiCorp
exercised its option to convert the full amount owing under the loan into shares
of common stock. The Company had borrowed $6,686,473 and interest of $313,527
had been accrued. An agreement was reached between the Company and PacifiCorp
which allowed them to convert the full $7,000,000 owing under the loan into
1,000,000 shares of common stock. The Company also issued 27,000 shares to PFS
under antidilution provisions of this agreement.
On March 6, 1998 the Company and Alabama Synfuel #1 completed the sale
of a synthetic fuel briquetting plant in Birmingham, Alabama to PacifiCorp under
the terms of the Project Purchase Agreement dated March 20, 1997 and as
subsequently amended. The purchase price for the facility was $6,500,000 and was
paid with a note that bears interest at twelve percent (12%) per annum. The
promissory note executed by PacifiCorp to the Company is collateralized by the
Alabama Plant and provides for periodic payments through February 2003.
In October 1997, the Company entered into an agreement with AJG
Financial Services, Inc. ("AJG"), whereby AJG agreed to provide financing for
the wash plant being constructed by the Company to provide washed coal fines to
20
<PAGE>
the Utah Plant. The financing consists of a note bearing interest at 6% per
annum with principal and interest due and payable two years from the time the
debt is incurred. As additional consideration to AJG for the financing, the
Company issued warrants to purchase Company common stock in an amount equal to
10% of the dollar amount financed, with fifty percent of the shares having a
purchase price of $10 per share and fifty percent of the shares having a
purchase price of $20 per share. The warrants are immediately exercisable and
expire in two years.
As of June 30, 1998, the Company had a working capital deficit of
$9,030,541 compared to a working capital deficit of $3,195,420 at September 30,
1997. This increase resulted primarily from financing of synthetic fuel
facilities construction under short-term financing arrangements. At June 30,
1998, the Company owned four synthetic fuel facilities that were completed in
June and all of which were operational and available for sale. The Company
expects to sell these facilities and with the proceeds from the sales retire the
related borrowings. The Company believes that additional advanced license fees
to be received, earned license fees to be received and, if necessary, available
financing will be sufficient to fund the operations of the Company until cash
flows from operations are sufficient to fund the Company's operations. However,
there is no assurance that the Company will be able to obtain the necessary
financing or receive sufficient cash flows from operations to fund its
operational needs or to meet unexpected financing needs.
The Company anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting Technology; (ii) operating fees for
the operation of facilities owned by third parties; (iii) payments on accounts
and notes receivable and (iv) proceeds of equity and debt offerings will be
available and used to fund working capital and other operating needs during the
next twelve month period.
The Company has contracted with its licensees to provide binder
materials on a cost plus basis subject to certain adjustments. The Company
expects to have increased profits from binder materials during the last six
months of calendar year 1998. As previously mentioned, there are twenty-four
sythetic fuel facilities currently utilizing the Company's proprietary
technology that purchase their binder products from the Company. The Company
expects to earn increased gross profits from the sale of binder to these
facilities in proportion to their increased production and sales of synthetic
fuel.
Under current contracts, the only facility owned by a third party for
which the Company has operational responsibility is the Utah Plant. The Company
will earn a prescribed amount per ton for product produced at this facility. The
Company expects that there could be other plants for which the Company will have
operational responsibility and for which it will earn an operation and
maintenance fee. The Company does not expect that operation and maintenance fees
will constitute a material portion of its revenues in the future.
Existing Debt Arrangements
In November 1996, the Company issued convertible subordinated
debentures in the principal amount of $1,000,000 to three persons not affiliated
with the Company. The convertible subordinated debentures accrue interest at
prime plus two percent (2%) with interest and principal payable in full on June
30, 1998. Through a separate subscription agreement, the Company has granted
piggy-back registration rights to the investors for Company common stock issued
upon conversion of the convertible subordinated debentures. On June 30, 1998 the
debentures were converted as $11 per share and the Company issued 107,174
restricted shares of common stock which reflected the principal of $1,000,000
and accrued interest of $178,904.
In December 1996, the Company entered into a Debenture Agreement and
Security Agreement with AJG, whereby the Company borrowed $1,100,000, pursuant
to a Convertible Subordinated Debenture accruing interest at 6% per annum and
maturing three years from its date of issuance (the "Subordinated Debenture")
and $2,900,000 pursuant to Senior Debentures (the "Senior Debenture"). The
Subordinated Debenture (including accrued interest) was converted to 140,642
shares of the Company's common stock on May 5, 1997. The Company has granted
piggy-back and demand registration rights to AJG for the Company common stock
issued on conversion of the Subordinated Debenture. The Senior Debentures are
collateralized by all real and personal property purchased by the Company with
the proceeds of the Senior Debenture. The proceeds of the Senior Debenture were
21
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used to satisfy contractual obligations of the Company, for working capital and
to purchase equipment used to construct briquetting facilities to be managed
and/or sold by the Company or affiliates of the Company.
The Company constructed a coal wash plant to provide washed coal fines
to the Utah Plant for the manufacture of synthetic fuel. A portion of these
construction costs were financed through AJG. The total estimated cost for the
wash plant is approximately $7.7 Million. As of June 30, 1998, the Company had
borrowed $4,325,433 under its arrangement with AJG. The financing is evidenced
by a promissory note executed and delivered by the Company to AJG and is secured
by the wash plant. The note currently bears interest at 6% per annum with
principal and interest due and payable two years from the time the debt was
incurred. As additional consideration to AJG for the financing, the Company
agreed to grant warrants to purchase Company common stock in an amount equal to
10% of the dollar amount financed, with fifty percent of the shares having a
purchase price of $10 per share and fifty percent of the shares having a
purchase price of $20 per share. The warrants are immediately exercisable and
expire in two years.
During the quarter ended March 31, 1998, the Company entered into an
additional agreement with AJG to borrow up to $6.5 million at an interest rate
of 6% per annum to be used for construction of a briquetting facility located in
West Virginia. As of June 30, 1998 the Company had received $6,680,000 under
this borrowing agreement. In July 1998, the Company repaid $180,000 under this
arrangement to bring the net borrowings to $6.5 million under this agreement.
Amounts borrowed and accrued interest are due in full in February 2001.
On March 20, 1997, the Company entered into a Convertible Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp amended the Loan Agreement. Under the amended Loan
Agreement terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down promissory note (the "Promissory Note") payable to PacifiCorp. On March 3,
1998, PacifiCorp exercised its option to convert the full amount of $7,000,000
owing under the loan into 1,000,000 shares of common stock plus an additional
27,000 shares pursuant to anti-dilution provisions of the loan agreement.
Pursuant to the Registration Rights Agreement, dated as of March 20, 1997,
between the Company and PacifiCorp, PacifiCorp has been granted certain demand
and piggy-back registration rights with respect to shares of Company common
stock that were acquired by PacifiCorp pursuant to the Loan Agreement.
On January 29, 1998 the Company entered into a loan and security
agreement with Fun Enterprises, Pty Ltd. ("Fun"), a current holder of the
Company's Class B preferred stock, relating to the development and construction
of a mobile, skid-mounted synthetic fuel production facility at a coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to $5,800,000. The interest rate will be 12% per annum until August
31, 1998, and 15% per annum thereafter until paid. Fun will also have the right
to receive certain royalties after the facility is sold. As of the date of this
filing the Company has drawn $5,120,000 under this arrangement. The loan is due
in full at the earlier of the sale of the facility or August 31, 1999. The
Company has entered into a letter of intent with the eastern coal company to
provide feedstock for the plant, to operate the plant, and to provide synthetic
fuel sales services. Construction of the facility was completed prior to June
30, 1998.
On March 17, 1998, the Company entered into a loan agreement in which
Trans Pacific Stores, Ltd. ("TPS") agreed to loan the Company up to $4,000,000.
The loan is secured by future earned license fees payable to the Company
resulting from the synthetic fuel manufacturing facilities constructed by Pace
Carbon Fuels, LLC. Interest on the outstanding principal balance accrues at
twelve percent (12%) per annum. The interest rate is adjusted to thirteen
percent (13%) on September 20, 1998 and to fourteen percent (14%) on December
20, 1998. Each time the interest rate is adjusted, a one percent (1%) renewal
fee of $40,000 is due and payable. Interest on the unused portion of the
borrowing will accrue interest at one percent (1%) per annum until the loan is
paid in full. The balance and interest is due in full before March 20, 1999. As
of June 30, 1998, $4,000,000 had been borrowed under this arrangement.
On June 12, 1998, the Company entered into an additional loan agreement
with Trans Pacific Stores, Ltd. wherein TPS agreed to loan the Company up to
$4,000,000. Collateral for the first $2,200,000 of borrowings under this note is
22
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a continuing interest in the promissory note as amended August 26, 1996 received
by the Company in connection with the sale of certain construction companies;
collateral for borrowings for the next $1,800,000 is a continuing interest in
future cash flows payable to the Company pursuant to an agreement between Fluor
Corp/ A.T. Massey ("Massey") and the Company dated December 4, 1997. Interest on
the outstanding principal balance accrues at eighteen percent (18%) per annum.
On the four-month anniversary of this note, the interest rate shall be adjusted
to twenty-two percent (22%) per annum, until the loan has been paid in full. All
principal and interest is due and payable on or before twelve months following
execution of this note. TPS could also be granted warrants to purchase up to
100,000 shares of restricted common stock of the Company In an amount equal to
$100,000 multiplied by the quotient of the outstanding borrowings divided by
$4,000,000, at an exercise price equal to the closing bid price on the
four-month anniversary. Warrants granted, if any, may be exercised within two
years of the date of issuance. As of June 30, 1998, $2,000,000 had been borrowed
under this arrangement. A member of the Company's Board of Directors is
affiliated with TPS.
On May 5, 1998, the Company entered into an Asset Purchase Agreement
("Agreement") with Mountaineer Synfuel, L.L.C.("Mountaineer"), wherein the
Company agreed to sell a synthetic fuel facility located in West Virginia upon
the occurrence of certain future events. In connection with this Agreement,
Mountaineer agreed to loan Covol up to $8,500,000 to be used for the
construction and working capital requirements of the facility. Amounts loaned
are to be repaid upon the earlier of the Closing Date of the purchase or January
1, 1999. As of June 30, 1998, $8,250,000 had been received under this Agreement,
of which $8,250 came from the Company as the owner of a .1% membership interest
in Mountaineer.
23
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Forward Looking Statements
Statements regarding the Company's expectations as to the financing,
development and construction of facilities utilizing its Briquetting Technology,
the receipt of licensing fees, operating revenues and other information
presented in this Quarterly Report on Form 10-Q that are not purely historical
by nature, including those statements regarding the Company's future business
plans, the construction and estimated completion of facilities, the estimated
capacity of facilities, the availability of coal fines, the marketability of the
synthetic fuel and other briquettes and the financial viability of the proposed
facilities, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. In addition to
matters affecting the Company's industry or the coal industry or the economy
generally, factors which could cause actual results to differ from expectations
set forth in the above-identified forward looking statements include, but are
not limited to, the following:
(i) The commercial success of the Briquetting Technology.
(ii) Procurement of necessary equipment to operate facilities.
(iii) Securing of necessary sites and raw materials for facilities to be
operated.
(iv) Qualification of synthetic fuel facilities for tax credits under
Section 29 of the Internal Revenue Code of 1996, as amended
("Section 29")
(v) Ability to obtain needed additional capital on terms acceptable to
the Company.
(vi) Changes in governmental regulation or failure to comply with
existing regulation which may result in operational shutdowns of
its facilities.
(vii) The availability of tax credits under Section 29. (viii)The
commercial feasibility of the Briquetting Technology upon the
expiration of Section 29 tax credits.
(ix) Ability to meet financial commitments under existing contractual
arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company entered into a letter of intent with Innovative Technologies
("Innovative") in July of 1995 to apply the Company's Briquetting Technology to
certain metallic ores supplied by Innovative. The Company conducted numerous
tests of the ore through the fall of 1995, and concluded from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997, Innovative Holding Company, Inc., a
California corporation, and ORO Limited, a California limited partnership, filed
a civil complaint against the Company alleging breach of the letter of intent in
the amount of $500,000 plus damages. The complaint was filed in the Superior
Court of California, County of Orange (Case No. 776083). The case is currently
in trial and the Company believes that it will be successful in defending the
suit.
24
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The following sets forth all securities issued by the Company within the
past fiscal quarter without registering the securities under the Securities Act
of 1933, as amended. No underwriters were involved in any stock issuances nor
were any commissions or similar fees paid in connection therewith. However, the
Company did pay finders fees in the form of cash, stock or warrants in
connection with various securities issued.
The issuance of qualified options is required to be based on market
value. Accordingly, the exercise price is set based on the market price of the
Company's common stock, even though the options convert into restricted stock.
The Company believes that the following issuances of shares of common
stock or securities for contingency issuable common stock were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the exemption set forth in Section 4(2) or 4(6) thereof or Regulation D
promulgated thereunder and the certificate for each security bears a restrictive
legend.
In March 1998, PacifiCorp exercised their option to convert $7,000,000
owing including interest under a convertible loan into 1,000,000 shares of
common stock. In April 1998, an additional 27,000 shares were issued pursuant to
certain antidilution provisions under the loan agreement.
In April and May of 1998, the Company issued 28,157 shares and 64,200
shares, respectively, of common stock to certain accredited investors in
exercise of warrants at $8.00 per share. The consideration was paid in cash. The
warrants were initially granted in connection with units privately placed in
September and October of 1997. The remaining 23,200 shares underlying warrants
expired as of April 30, 1998.
In April 1998, a consultant of the Company exercised options previously
granted at $1.50 per shares. The Company issued 16,400 shares of the Company's
common stock in exercise of these options. The consideration was paid in cash.
In May 1998, the Company issued 55,000 shares of common stock to
Michael Midgley, a former officer of the Company, in exercise of options at
$1.50 per share. The consideration was paid in cash.
In May 1993, the Company granted options to acquire 50,000 shares of
common stock at an exercise price of $12.63 per share to Steven Stewart, chief
financial officer for the Company, as compensation. The shares vest over a 60
month period on a pro-rata basis.
In June 1998, the Company granted options to acquire 72,250 shares of
common stock at an exercise price of $13.56 per share to certain directors of
the Company as director compensation. The shares are fully vested.
In June 1998, the Company issued 2,500 shares of the Company's common
stock to Stan Kimball in exercise of options at $1.50 per share. The
consideration was paid in cash.
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In June 1998, the Company granted options to acquire 25,000 shares of
common stock at $7.25 per share to Combustion Resources, LLC in consideration
for past services performed. The shares are fully vested and expired 10 years
from the date of grant.
In June 1998, Mr. Douglas M. Kinney and Mr. Gordon L. Deane exercised
their options to convert $1,000,000 owing under a convertible subordinated
debenture into shares of common stock at $11.00 per share. As of June 30,1998
$178,904 of interest had accrued. On July 3, 1998 the company issued 107,174 in
connection with the conversion of these debentures.
In June 1998, the Company granted incentive stock options to acquire
587,000 shares of common stock of the Company at $12.97 per share, to 12
employees of the company.
The Company believes that the following issuances of shares of common
stock and other securities were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to the exemption set forth under
Regulation S thereof:
In April 1998, and in reliance on Regulation S, the Company issued 160
shares of common stock to an investor in connection with the exercise of
warrants at $7.25 per share. The warrants were initially granted in connection
with the sale of units in May and July of 1997. The consideration was paid in
cash.
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<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation S-K,
are incorporated herein by reference in accordance with the
provisions of Rule 12b-32.
10.52* Technology License and Binder Purchase Agreement
between Mountaineer Synfuel, L.L.C., Licensee, and
Covol Technologies, Inc., Licensor.
10.52.1 Asset Purchase Agreement between Mountaineer Synfuel,
L.L.C. as Purchaser and Covol Technologies, Inc. as
Seller dated May 5, 1998.
10.52.2 Promissory Note between Covol Technologies, Inc. and
Mountaineer Synfuel, L.L.C. dated May 5, 1998.
10.52.3 Deed of Ground Lease between Upshur Property, Inc.
(Landlord) and Covol Technologies, Inc. (Tenant)
dated May 5, 1998.
Exhibit 27.1 Financial Data Schedule
* Exhibit contains confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
NONE
27
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
------------------------------------------
Brent M. Cook, Chief Executive Officer and
Principal Executive Officer
By: /s/ Steven G. Stewart
------------------------------------------
Steven G. Stewart, Chief Financial Officer
and Principal Financial Officer
28
TECHNOLOGY LICENSE AND BINDER PURCHASE AGREEMENT
THIS TECHNOLOGY LICENSE AND BINDER PURCHASE AGREEMENT (the
"Agreement"), is made and entered into as of May 5, 1998 by and between
Mountaineer Synfuel, L.L.C., a Delaware limited liability company (the
"Licensee"), and Covol Technologies, Inc., a Delaware corporation (the
"Licensor").
WHEREAS Licensor has developed a proprietary process to produce
synthetic coal fuel extrusions, pellets, and briquettes (collectively referred
to herein as "briquettes") from waste coal dust, coal fines and other coal
derivatives, and Licensor is entitled to license the synthetic Coal Briquetting
Technology to Licensee;
WHEREAS Licensor has or will purchase a synthetic fuel manufacturing
plant under a binding construction contract with Centerline Engineering
Corporation (the "Facility") located near Tallmansville, Upshur County, West
Virginia on property owned by Upshur Property, Inc. (the "Project");
WHEREAS Licensee wishes to obtain and Licensor wishes to grant to
Licensee a license for the synthetic Coal Briquetting Technology in connection
with the Project on the terms and conditions set forth in this Agreement, and
Licensee wishes to obtain and Licensor wishes to sell to Licensee the
Proprietary Binder Material (as defined below) manufactured by Licensor for use
in the operation of the Project.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Licensor and Licensee each agree as follows:
Section 1. Definitions.
"Applicable Percentage" means the Licensor's Earned Royalty
rate per MM Btu as set forth in Section 3.3 divided by the amount of Section 29
Tax Credit per MM Btu.
"Coal Briquetting Technology" means all intellectual property,
patents (including but not limited to United States Patent Numbers 5,599,361;
5,487,764; and 5,453,103) and applications therefor, printed and not printed
technical data, know-how, trade secrets, copyrights and other intellectual
property rights, inventions, discoveries, techniques, works, processes, methods,
plans, software, designs, drawings, schematics, specifications, communications
protocols, source and object code and modifications, test procedures, program
cards, tapes, disks, algorithms and all other scientific or technical
information in whatever form relating to, embodied in or used in the proprietary
process to produce synthetic coal fuel briquettes from waste coal dust, coal
fines and other similar coal derivatives, including all such information in
existence as of the date of this Agreement as well as related information later
developed by Licensor; provided, however, that the defined term "Coal
Briquetting Technology" shall not include the proprietary process/method or
other binder material or composition developed by Licensor to produce synthetic
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<PAGE>
coke briquettes from coke breeze, iron revert materials, or any technology for
other than the processing and production of synthetic coal fuel briquettes.
Nothing in this Agreement is intended to grant to Licensee the right to apply
the Coal Briquetting Technology to produce anything other than synthetic coal
fuel intended to qualify for tax credits under Section 29(c)(1)(C) of the
Internal Revenue Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Developed Technology" means any inventions, "Improvement," or
new technology that Licensor may conceive, make, invent, or suggest in
connection with Licensor's disclosure to Licensee of the Coal Briquetting
Technology, all of which the parties hereto acknowledge and agree constitutes
the sole and exclusive property of Licensor. "Developed Technology" also means
any inventions, "Improvement," or new technology directly related to the Coal
Briquetting Technology that Licensor or Licensee may conceive, make, invent or
suggest relating to the Coal Briquetting Technology during the Term of this
Agreement. "Improvement" means an alteration or addition to an invention or
discovery which enhances, to some extent, performance or economics without
changing or destroying a product's, device's, or method's basic identity and
essential character. An Improvement may comprise alterations or additions to
either patented or unpatented inventions, discoveries, technology, or devices,
and may or may not be patentable.
"Earned Royalty" has the meaning set forth in Section 3.3.
"Effective Date" means the date of this Agreement set forth
above.
"Facility" has the meaning set forth in the preamble.
"Final Determination" has the meaning set forth in Section
3.5(3).
"Initial Royalty" has the meaning set forth in Section 3.2.
"IRS" means the Internal Revenue Service.
"Licensee" has the meaning set forth in the preamble.
"Licensor" has the meaning set forth in the preamble.
"Maximum Tax Credit Amount at Risk" has the meaning set forth
in Section 3.5(4).
"Project" has the meaning set forth in the preamble.
"Proprietary Binder Material" means and refers to the binder
compound necessary for the production, by Licensee, of synthetic coal briquettes
as contemplated under the Purchase Agreement and/or the Limited Liability
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<PAGE>
Company Agreement of Licensee and which briquettes are reasonably expected to
constitute "qualified fuels" pursuant to the terms of Section 29(c)(1)(C) of the
Code and with respect to which Section 29 is applicable pursuant to Section
29(f) and 29(g) of the Code. The parties acknowledge and agree that the
Proprietary Binder Material is not a staple article of commerce suitable for
substantial non-infringing uses, but rather is an integral and inseparable part
of the Coal Briquetting Technology and developed technology owned by Licensor.
"Royalty" means the Initial Royalty and the Earned Royalty.
"Tax Credit" means tax credit for federal income tax purposes
pursuant to Section 29 of the Internal Revenue Code, as amended.
Terms used herein and not defined herein shall have the meanings
assigned thereto in the Asset Purchase Agreement of even date herewith between
the Licensor and the Licensee.
Section 2. License Grant.
2.1 General. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee, for the full and entire term
hereof, a non-exclusive license to use the Coal Briquetting Technology for
commercial exploitation (and not for research development purposes), including
the non-exclusive right to make, have made or use at the Facility and to sell or
otherwise transfer products which have been manufactured with the Coal
Briquetting Technology. Licensee hereby accepts the license on the terms hereof
and agrees to make and have made products using the Coal Briquetting Technology
at the Facility only under this License Agreement. Licensee shall not make or
have made products using the Coal Briquetting Technology or similar technology
except at the Facility. Licensee shall not have the right to sublicense the Coal
Briquetting Technology.
2.2 Licensor's Ownership of Developed Technology. Licensee
shall have the right and is hereby granted a non-exclusive license to use all
Developed Technology and/or Improvements relating to the Coal Briquetting
Technology without payment of any additional compensation to Licensor,
throughout the Term of this Agreement, subject to the restrictions and
limitations in this Section 2. All Developed Technology and/or Improvements
shall become Licensor's absolute property. Licensee shall at any time during the
Term of this Agreement and thereafter, at Licensor's reasonable request, execute
any patent papers covering such Developed Technology and/or Improvements as well
as any other documents that Licensor may consider necessary or helpful in the
prosecution of applications for a patent thereon or in connection with any
litigation or controversy related thereto; provided, however, that all expenses
incident to the filing of such applications and the prosecution thereof and the
conduct of such litigation shall be borne by Licensor.
2.3 Exclusive Technology. Licensee agrees to use only the Coal
Briquetting Technology and the Developed Technology at the Facility and not to
use any other technology for the production of solid synthetic fuel intended to
qualify for tax credits under Section 29(c)(1)(C) of the Code. Licensee further
agrees to use the Coal Briquetting Technology only under
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<PAGE>
authority of this License Agreement with Licensor. Licensee shall act in good
faith to comply with the Exclusive Technology provisions of this Agreement so as
to preserve Licensor's ownership of the proprietary Developed Technology.
2.4 Non-licensed Technology. Licensor retains the absolute
right to fully exploit its proprietary technology and processes, including but
not limited to the application of such technology embodied in the Coal
Briquetting Technology together with any improvements thereto, to produce,
market and use synthetic coke briquettes from coke breeze, iron revert
materials, and any other materials to which Licensor's technology can be
applied.
2.5 Confidentiality. Each of the parties hereby agree to
maintain the Coal Briquetting Technology confidential and not to disclose the
Coal Briquetting Technology, or any aspect thereof, or the Developed Technology
or Improvements, or any aspect thereof (collectively, the "Confidential
Information"). Notwithstanding the foregoing, information which (i) is or
becomes generally available to the public other than as a result of an
unauthorized disclosure by the parties or their respective agents, employees,
directors or representatives, (ii) was available to the party receiving
disclosure on a non-confidential basis prior to its receiving disclosure
hereunder, (iii) lawfully becomes available to the party receiving disclosure on
a non-confidential basis from a third party source (provided that such source is
not known by the party receiving disclosure or its agents, employees, directors
or representatives to be prohibited from transmitting the information), or (iv)
a party is compelled by legal process by any court or other authority to
disclose shall not be subject to the terms of this Section 1.5. In the case of
(iv) above, the compelled party shall give the other party prompt written notice
of such legal process in order that an appropriate protective order can be
sought and each party agrees not to oppose the other party's efforts to prevent
the disclosure of Confidential Information. At the termination of this
Agreement, all copies of any Confidential Information (including without
limitation any reports or memoranda) shall be returned by the party receiving
disclosure.
2.6 Know-How and Assistance. To enable Licensee to benefit
fully from the license of the Coal Briquetting Technology, Licensor shall
provide access to all relevant documentation, drawings, engineering
specifications and other know-how in its possession, reasonable access to its
employees or agents who are familiar with the Coal Briquetting Technology,
Developed Technology, and Improvements and shall provide such technical
assistance and training as is reasonably requested by Licensee relevant to the
provisions of this Agreement. Licensee shall reimburse the Licensor the travel
and other similar out-of-pocket expenses of Licensor in performing services
under this section; provided however, that Licensee shall obtain the prior
approval of Licensee for any expenditures in excess of $5,000.
Section 3. License Fee and Royalty.
3.1 License Fee. Licensee shall pay the Initial Royalty and
Earned Royalty as a license fee to Licensor.
3.2 Initial Royalty. Upon the execution of this Agreement,
Licensee shall pay * dollars ($*) to Licensor in immediately available funds
(the "Initial Royalty") as an initial
* Exhibit contains confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
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<PAGE>
royalty payment. Licensor shall thereupon lend such amount to Licensee as a
working capital loan, such loan to be repaid out of cash available after payment
of operating expenses on the basis set forth for subordinated payments of Earned
Royalty under Section 3.3.
3.3 Earned Royalty.
(a) Licensee shall be obligated to pay to Licensor
quarterly earned royalty payments ("Earned Royalty") which shall be due and
payable on each Quarterly Payment Date and on the Final Adjustment Date (subject
to Section 3.4). With respect to each Calendar Quarter, the Earned Royalty due
on the Quarterly Payment Date immediately following such Calendar Quarter shall
be an amount equal to the sum of (i) * % of the aggregate Estimated Tax Credits
generated by the Project during such Calendar Quarter and (ii) with respect to
the Earned Royalty due on any Adjustment Date, plus or minus *. Notwithstanding
the foregoing, the Licensor agrees that the Licensee shall not have any
obligation to make any Quarterly Payments of Earned Royalty unless and until the
date the conditions set forth in Section 3.1(g) in the Company Agreement have
been satisfied or waived. The final Earned Royalty shall be due on the Final
Adjustment Date and shall be in the amount of the Final Adjustment Amount if
such Final Adjustment Amount is a positive amount.
(b) The Manager of Licensee shall prepare its
calculation of the Estimated Tax Credits and the Earned Royalty for each
Calendar Quarter at the same time that the Manager prepares its calculation of
the amount of the Quarterly Contribution as provided in Section 3.1(e) of the
Company Agreement and shall submit a report showing the determination of the
Earned Royalty to the Licensor at the same time as the Manager submits the
report described in Section 3.1(f) of the Company Agreement to the Members'
Accountant for review.
(c) If the Licensor objects to the Manager's
calculation of any Earned Royalty, the Licensor shall notify the Purchaser
within two weeks after the Purchaser has submitted the report to the Licensor.
If the Licensor disputes the Purchaser's calculations, the Purchaser shall, in
good faith, consider the issues raised or in dispute and discuss such issues
with the Licensor and attempt to reach a mutually satisfactory agreement, taking
into account as well, any issues raised by the Members' Accountant and if such
dispute is promptly resolved, the adjusted amount agreed upon shall be the
Earned Royalty due. If the dispute is not promptly resolved, the Purchaser shall
pay, on the Quarterly Payment Date, the amount not in dispute. Thereafter, the
Licensor, the Manager and the Members' Accountant shall promptly select an
independent entity qualified and knowledgeable in the area who shall be
instructed to resolve the dispute promptly and, upon resolution of the dispute,
if it is determined that additional Quarterly Contributions are due from the
Members, the corresponding additional amount shall be paid to the Licensor
within ten days of the date of such determination, together with interest
thereon from the date sixty days after the relevant Quarterly Payment Date, at
the rate of 6% per annum.
* Exhibit contains confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
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<PAGE>
3.4 Payment Terms.
(a) The Earned Royalty with respect to each
Calendar Quarter shall be due to the Licensor not later than five days after the
Quarterly Contribution for such Calendar Quarter is due to the Purchaser from
the Members under the terms of Section 3.1(f) of the Company Agreement. Such due
date for Earned Royalty, being the date which is five days after the Quarterly
Contribution Date, is herein referred to as the "Quarterly Payment Date.
(b) *.
3.5 Tax Event. (1) *:
(i) *
(ii) *.
(2) For purposes of this Agreement, "Tax Event'"means *.
(3) For purposes of this Agreement, "Final Determination" means, with
respect to Tax Credits related to the Licensee,
(i) unless an adjustment is proposed with respect to any such
Tax Credits, the expiration of the applicable statute of limitations;
(ii) unless an administrative appeal or a judicial proceeding
is initiated by the Licensee or the affected Member, the date ninety
days after the issuance of a notice of deficiency;
(iii) unless judicial proceedings are initiated by the
Licensee or the affected Member, a final decision with respect to the
proposed adjustment by an IRS appeals officer, as evidenced by the
issuance of a 90-day letter, 870-AD or like notice and the expiration
of the period for initiating judicial proceedings;
(iv) unless appealed by the Licensee or the affected Member, a
final decision with respect to the proposed adjustment by the United
States Tax Court, Court of Federal Claims or the appropriate Federal
District Court and the expiration of the period for filing an appeal of
such decision;
(v) a final decision of a United States Court of Appeals with
respect to the proposed adjustment, unless a petition for certiorari to
the United States Supreme Court has been applied for and is pending or
has been granted with respect to such decision;
(vi) denial of certiorari by, or final decision of, the
United States Supreme Court; or
* Exhibit contains confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
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<PAGE>
(vii) the settlement of a proposed adjustment as evidence by a
closing agreement.
(4) For purposes of this Agreement, "Maximum Tax Credit Amount
at Risk" means the amount reasonably determined by any affected Member to be
potentially subject to disallowance by the Internal Revenue Service following a
Tax Event, plus interest and substantial understatement penalties, which amount
shall not exceed the product of (x) and sum of (I) the Tax Credits claimed by
such Member with respect to the operations of the Licensee for all open tax
years (so long as such claims are consistent with the applicable final tax
return of the Licensee as to any such tax year), it being understood that such
amount is not limited to amounts directly implicated by the Tax Event (since an
audit of one issue related to Tax Credits could result in a disallowance of
other such discovered later), plus (II) any interest and penalties payable by
such affected Member (to the extent attributable to Tax Credits arising from the
Licensee, multiplied by (y) the Applicable Percentage.
(5) Each of the Licensor and the Licensee agrees that, after
obtaining knowledge thereof and subject to restrictions or limitations that may
exist under confidentiality agreements with other licensees, it will give prompt
notice of any matter that is or could become a Tax Event or that the IRS has
commenced an examination of any other synthetic fuel production project
utilizing the proprietary process licensed under this Agreement, and the parties
as promptly thereafter as practicable shall meet to discuss in good faith
whether a Tax Event in fact exists or will likely occur and the consequences
thereof.
Section 4. Sales of Binder.
4.1 Sale and Purchase. Licensor shall sell to Licensee, and
Licensee shall purchase from Licensor, Licensee's requirements of Proprietary
Binder Material required to operate the Project. Licensor shall deliver the
Proprietary Binder Material at such times and in such amounts as requested by
Licensee. Licensor shall invoice Licensee for Proprietary Binder Material
monthly. Payments for Proprietary Binder Material delivered by Licensor during
any calendar month shall be due and payable to Licensor on the tenth Business
Day of the immediately succeeding month. Payments after the applicable due dates
shall accrue interest at the rate of one percent per month.
4.2 Price. The price which Licensee shall pay for the
Proprietary Binder Material delivered by Licensor shall be an amount equal to
(i) Licensor's direct and actual costs (including, but not limited to material,
labor, and transportation costs) and a percentage of the total overhead costs of
Licensor reasonably reflecting the ratio of the administrative costs incurred in
connection with the manufacture and sale of the Proprietary Binder Material,
plus (ii) * ($ * ) per ton of synthetic fuel product (based upon 2% binder).
4.3 Representations and Warranties. Licensor represents,
warrants and covenants as follows:
* Exhibit contains confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
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<PAGE>
(a) Licensor shall convey to Licensee good title to all
Proprietary Binder Material purchased by Licensee from Licensor
hereunder, free and clear of any and all liens, claims and encumbrances
of any type whatsoever.
(b) All Proprietary Binder Material shall be delivered in
compliance with applicable environmental laws and governmental
regulations.
(c) At Licensee's reasonable request, Licensor shall replace,
or refund the purchase of, all non-conforming Proprietary Binder
Material.
(d) There will be available at the Facility from time to time
as reasonably requested by Licensee sufficient quantities of the
Proprietary Binder Material to supply the requirements of the Licensee
for the production of up to 480,000 tons of Product per year from the
date hereof until at least December 31, 2007.
(e) The Proprietary Binder Material may be produced from the
ETG-400 mix of monomers; other monomers may be substituted in such mix,
to produce Proprietary Binder Material that will achieve the same
reaction and resulting polymerization pursuant to Licensor's patented
Coal Briquetting Technology, that will achieve the same significant
chemical change, and that will result in an end product chemically
indistinguishable other than for trace substances that have an
immaterial effect on the net change, in each case compared to an end
product that is produced using the Proprietary Binder Material
incorporating the ETG-400 formula. Prior to and as a condition to
substituting other monomers for ETG-400, the Licensor will provide to
the Licensee a written report of Craig N. Eatough, Ph.D., or another
third party fuels expert reasonably acceptable to the Licensor and
Licensee to the effect that (in such third party's professional
judgment) the monomers so to be substituted will achieve the results
set forth in the first sentence of this Section 4.3(e).
4.4 Order Procedure. Licensee shall deliver all purchase
orders for Proprietary Binder Materials at least thirty (30) days in advance of
the first day of the month in which delivery of such Proprietary Binder Material
is required under such purchase order, and all such purchase orders received by
Licensor during the term of this Agreement shall be deemed to have been accepted
by Licensor. (For example, Licensee shall deliver a purchase order for December
delivery by no later than November 1st). Each such purchase order shall be
delivered either (i) in writing (including by fax), or (ii) orally by telephone
by an authorized agent of Licensee (subject to the condition that it is followed
by a written purchase order within 24 hours). Such purchase orders shall be sent
to Licensor at such address as Licensor shall direct.
4.5 Delivery and Acceptance. All Proprietary Binder Material
purchased hereunder shall be delivered F.O.B. the Facility. Licensor shall
arrange for any necessary transportation of the Proprietary Binder Material to
the Facility. Licensee shall bear the expense of unloading of Proprietary Binder
Material from the trucks. Licensee shall have a reasonable opportunity to sample
Proprietary Binder Material delivered to it hereunder to confirm that such
Proprietary Binder Material conforms to the terms and requirements hereof, and
Licensee shall
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<PAGE>
not be deemed or required to accept any such Proprietary Binder Material prior
to the completion of such sampling.
4.6 Delivery Of Binder Material. If Licensor's ability to
deliver the Proprietary Binder Material to Licensee will be interrupted or
terminated for any reason, Licensor shall give not less than ninety (90) days
notice to Licensee. Subject to giving notice of its inability to deliver the
Proprietary Binder Material to Licensee (or, in the absence of such notice, the
actual failure to deliver the Proprietary Binder Material for at least twenty
days after Licensee gives written notice of non-delivery to Licensor), Licensor
hereby grants to Licensee a nonexclusive license for the term of this Agreement
(or such shorter period as provided in the proviso hereto) to use the technology
used to manufacture the Proprietary Binder Material to manufacture the
Proprietary Binder Material in sufficient quantities to operate the Facility to
full capacity, and such technology shall be deemed "Coal Briquetting Technology"
for the purposes of this Agreement; provided, however, that the license granted
to Licensee under this Section shall cease (subject to reinstatement upon the
reoccurrence of the events contemplated above) and sales of Proprietary Binder
Material under the terms of this Agreement shall be reinstated, in each case, on
a date not less than ninety (90) days after Licensor gives notice to Licensee,
together with evidence reasonably satisfactory to Licensee that Licensor is able
to deliver the Proprietary Binder Material in accordance with this Agreement. No
additional fee or royalty shall be payable to Licensor in connection with the
license granted pursuant to this Section and Licensee shall be responsible for
its own direct out-of-pocket operating costs incurred in connection with the
production of Proprietary Binder Material pursuant to this Section. Licensor
will deliver to a safety deposit box maintained by Licensor at the Bank of
American Fork, Highland Branch, with a mutually agreed upon trustee, a written
copy of the formula used by Licensor to manufacture the proprietary binder
material and any Improvements thereon. Such trustee shall agree to provide the
formula to Licensee upon Licensee's certifying to the trustee that Licensee has
a right of access to such formula pursuant to this Section 4.6 because
Licensor's ability to deliver the Proprietary Binder Material to Licensee has
been interrupted or terminated.
Section 5. Records; Inspection; Confidentiality. Each party hereto
shall keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
Section 5.
Section 6. Enforcement Of Proprietary Rights. Licensee shall
cooperate in good faith, with Licensor's efforts to enforce its proprietary
patent and trade secret rights.
Section 7. Representations and Warranties.
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<PAGE>
7.1 Authority. Each of Licensee and Licensor represents and
warrants that (i) the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized on its behalf by all requisite action, corporate or otherwise, (ii)
it has the full right, power and authority to enter into this Agreement and to
carry out the terms of this Agreement, (iii) it has duly executed and delivered
this Agreement, and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
7.2 No Consent. Each of Licensee and Licensor represents and
warrants that no approval, consent, authorization, order, designation or
declaration of any court or regulatory authority or governmental body or any
third-party is required to be obtained by it, nor is any filing or registration
required to be made therewith by it for the consummation by it of the
transactions contemplated under this Agreement.
7.3 Intellectual Property Matters. Licensor represents and
warrants to its best knowledge and good faith belief that it (i) owns, free and
clear of all liens and encumbrances, intellectual property, patents (including
but not limited to United States Patent Numbers 5,599,361; 5,487,764; and
5,453,103) and applications therefor, printed and not printed technical data,
know-how, trade secrets, copyrights and other intellectual property rights and
all other scientific or technical information in whatever form relating to,
embodied in or used in the proprietary process to produce synthetic coal fuel
briquettes from waste coal dust, coal fines and other similar coal derivatives,
and, the right to freely make use, sell and exploit Proprietary Binder Material
used in manufacturing synthetic coal fuel briquettes from waste coal dust, coal
fines and other similar coal derivatives, (ii) has the right and power to grant
to Licensee the licenses granted herein, (iii) has not made and will not make
any agreement with another in conflict with the rights granted herein, and (iv)
has no knowledge that the sale or use of the rights, Proprietary Binder Material
and/or licenses granted herein as contemplated by this Agreement would infringe
any third-party's intellectual property rights.
7.4 Indemnification. Each party agrees to indemnify, defend
and hold harmless the other party and its partners, directors, officers,
members, agents, representatives, subsidiaries and affiliates from and against
any and all claims, demands or suits (by any party, including any governmental
entity), losses, liabilities, damages, obligations, payments, costs and expenses
(including the costs and expenses of defending any and all actions, suits,
proceedings, demands and assessments which shall include reasonable attorneys'
fees and court costs) resulting from, relating to, arising out of, or incurred
in connection with any breach of any of the representations, warranties and/or
covenants contained in this Agreement.
Section 8. Term. The Term of this Agreement is (a) for the period
commencing on the effective date of this Agreement and ending on January 1, 2008
(or, if later, the last day on which sales of synthetic fuel can generate Tax
Credits); or (b) for the full life of the last U.S. Patents to expire which
disclose and claim Covol's proprietary Coal Technology, defined below, whichever
date is earlier. Any extension of this Agreement must be in writing, signed by
both parties.
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<PAGE>
Section 9. Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 10. Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 11. Notices. All notices required or authorized by this
Agreement shall be effective upon receipt and given to the parties in writing by
fax, mail, or courier as follows:
To Licensor: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, UT 84043
Fax: (801) 768-4483
Attention: President
To Licensee: Mountaineer Synfuel, L.L.C.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, UT 84043
Fax: (801) 768-4483
Attention: President
Section 12. Remedies Cumulative. Remedies provided under this Agreement
shall be cumulative and in addition to other remedies provided by law or in
equity.
Section 13. Entire Agreement. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof. There are no
promises, terms, conditions, obligations, or warranties other than those
contained herein. This Agreement supersedes any and all prior communications,
representations, or agreements, verbal or written, between the parties relating
to the subject matter hereof. This Agreement may not be amended except in
writing signed by the parties hereto.
Section 14. Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah, exclusive of its conflict of laws
rules.
Section 15. Assignment. This Agreement may not be assigned, in whole or
in part, by any party without the written consent of the other party, which
consent shall not be unreasonably withheld
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<PAGE>
Executed by the duly authorized representative of the parties on the
date and year first above written.
COVOL TECHNOLOGIES, INC. MOUNTAINEER SYNFUEL, L.L.C.
By: COVOL TECHNOLOGIES, INC.
By: /s/ Stanley M. Kimball By: /s/ Brent M. Cook
Name: Stanley M. Kimball Name: Brent M. Cook
Title: CFO Title: President
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ASSET PURCHASE AGREEMENT
between
MOUNTAINEER SYNFUEL, L.L.C.,
as Purchaser
and
COVOL TECHNOLOGIES, INC.
as Seller
Dated
May 5, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
Section 1.01. Definitions...................................................1
ARTICLE II
PURCHASE
Section 2.01. Sale and Purchase of Assets...................................6
Section 2.02. Adjustment Amounts...........................................10
Section 2.03. Deferred Contingent Payments.................................11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Section 3.01 Assets........................................................12
Section 3.02. Ownership of Assets...........................................12
Section 3.03. Organization; Due Authorization; Binding Obligation..........12
Section 3.04. Absence of Certain Changes or Events.........................12
Section 3.05. Insurance....................................................12
Section 3.06. Commitments..................................................12
Section 3.07. Legal Proceedings............................................13
Section 3.08. Taxes........................................................13
Section 3.09. Compliance with Laws.........................................13
Section 3.10. Environment..................................................14
Section 3.11. Non-Contravention............................................14
Section 3.12. Regulatory Approvals.........................................14
Section 3.13. Conduct of Operations........................................14
Section 3.14. Designs and Drawings.........................................15
Section 3.15. Licenses, Permits, Etc.......................................15
Section 3.16. No Tax-Assisted Financing....................................15
Section 3.17. IRS Ruling...................................................15
Section 3.18. Certain Expectations.........................................15
Section 3.19. Projections..................................................16
Section 3.20. Production Capacity of Synthetic Coal Facilities.............16
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Section 4.01. Organization.................................................17
Section 4.02. Due Authorization of the Purchaser; Binding Obligation.......17
Section 4.03. Non-Contravention............................................17
Section 4.04. Regulatory Approvals.........................................17
i
<PAGE>
Section 4.05. Legal Proceedings............................................17
Section 4.06. Availability of Funds........................................18
ARTICLE V
FURTHER AGREEMENTS AND ASSURANCES
Section 5.01. Confidentiality..............................................18
Section 5.02. Reports and Financial Statements.............................18
Section 5.03. Concerning the Project.......................................19
ARTICLE VI
CONDITIONS TO THE PURCHASE
Section 6.01. No Legal Proceedings.........................................19
Section 6.02. Project Contracts............................................19
ARTICLE VII
CONDITIONS TO THE SALE
Section 7.01. No Legal Proceedings.........................................20
Section 7.02. Payment of Purchase Price....................................20
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.01. Events of Default............................................20
Section 8.02. Purchaser's Obligation to Take Action Against
Defaulting Member............................................21
ARTICLE IX
CONSEQUENCES OF BREACH OF REPRESENTATIONS
AND WARRANTIES AND COVENANTS
Section 9.01. Consequence of Breach of Representations and
Warranties and Covenants ...................................21
ARTICLE X
TERMINATION OF AGREEMENT
Section 10.01. Mutual Agreement............................................21
Section 10.02. Noncompliance; Nonperformance...............................21
ARTICLE XI
MISCELLANEOUS
Section 11.01. Entire Agreement............................................22
Section 11.02. Successors and Assigns......................................22
ii
<PAGE>
Section 11.03. Counterparts; Effectiveness.................................22
Section 11.04. Headings....................................................22
Section 11.05. Amendment; Waiver; Requirement of Writing...................22
Section 11.06. Notices.....................................................22
Section 11.07. Governing Law...............................................23
Section 11.08. Exclusion of Consequential Damages..........................23
Section 11.09. No Third-Party Beneficiaries................................23
Section 11.10. Interim Funding.............................................23
Exhibit A Base Case
Exhibit B Form of Deferred Contingent Payment Note
Exhibit C Interim Funding Draw Schedule
iii
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of
May 5, 1998, between MOUNTAINEER SYNFUEL, L.L.C., a Delaware limited liability
company (the "Purchaser"), and COVOL TECHNOLOGIES, INC., a Delaware corporation
(the "Seller"),
W I T N E S S E T H :
WHEREAS, the Seller has constructed the Project and owns the
Assets (as such terms are defined below);
WHEREAS, the Seller desires to sell, assign, transfer and
convey (and upon placement in service for federal income tax purposes of the
Project, as defined below) the Purchaser desires to purchase and accept the
Assets for the consideration and on the terms set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the
mutual agreements hereinafter contained, the parties, intending to be legally
bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. For purposes of this Agreement, the
following terms have the meanings specified or referred to in this Section 1.01.
Terms used herein and not defined herein shall have the meaning assigned thereto
in the Amended and Restated Limited Liability Company Agreement of Mountaineer
Synfuel, L.L.C. dated May 5, 1998.
"Adjustment Date" means the first Quarterly Payment Date after
June 30 of each year.
"Annual Adjustment Amount" means the amount which is
determined under Section 2.02(a) hereof as the adjustment to be made to the
Contingent Payments otherwise due on the Adjustment Date.
"Assets" means the assets which comprise the Project,
including those identified on Schedule 3.01 hereto (on the date hereof, and at
the Closing, on the Closing Date), and the Lease.
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"Base Case" means the pro forma economic projections of the
expected financial results of the Project attached hereto as Exhibit A.
"Calendar Quarter" means, in each calendar year, each
three-month period beginning with January, April, July or October.
"Capacity Warranty" has the meaning specified in Section 9.01
hereof.
"Capital Contributions" means the amounts contributed to the
Limited Liability Company by the Members as provided in the Company Agreement.
"Cash Expenditures" means, with respect to any period, all
disbursements of cash by the Purchaser including, but not limited to, payments
of operating expenses, amounts payable by the Purchaser as Contingent Payments
under this Agreement (determined without regard to the application of any
provision hereof permitting or requiring all or any portion of such Contingent
Payments to be deferred due to Operating Deficits), amounts paid as royalties or
license fees under the Technology License and Binder Purchase Agreement or other
agreements regarding technology utilized by the Purchaser, payments of principal
and interest as it becomes due on indebtedness and any amounts set aside in such
period as Reserves or placed in escrow pursuant to this Agreement or the
Technology License and Binder Purchase Agreement; provided that, Cash
Expenditures shall not include distributions to the Members or amounts expended
or applied from Initial Contributions, other than amounts expended or applied as
working capital or otherwise to cover operating costs identified in the Project
Construction Budget.
"Cash Receipts" means, with respect to any period, all cash
receipts of the Purchaser from the operation of the Project or the sale of fuels
produced thereby and any other cash receipts from Purchaser operations or
assets, plus Quarterly Contributions plus that portion of the Initial
Contributions contributed and expended or applied as working capital or
otherwise to cover operating costs, in each case not to exceed the amounts
specified therefor in the Project Construction Budget, plus interest received on
any Reserves or accounts of the Purchaser or their subsidiaries; provided that,
Cash Receipts shall not include proceeds of borrowings.
"Closing" means the transfer of the Assets to the Purchaser
and the payment to the Seller of the Initial Payment.
"Closing Date" means the date and time (specified in notice by
Purchaser pursuant to Section 2.01(b)) as of which the Closing actually takes
place.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor law, and regulations issued by the IRS pursuant to the Internal
Revenue Code or any successor law.
"Company Agreement" means the Limited Liability Company
Agreement of the Purchaser as dated October 23, 1997 as amended and restated by
the Amended and Restated Limited Liability Company Agreement of the Purchaser
dated May 5, 1998.
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"Contingent Payment" means with respect to each Calendar
Quarter, the Contingent Payment due on the Quarterly Payment Date following the
end of such Calendar Quarter all as provided in Section 2.01(e) and the payment
due on the Final Adjustment Date.
"Deferred Contingent Payments" means (i) all amounts of
Contingent Payments which, under Section 2.03, are not paid on the Quarterly
Payment Date when such amounts become due and (ii) interest on the deferred
amount until paid.
"Encumbrance" means any charge, claim, community property
interest, condition, equitable interest, lien, option, pledge, security
interest, right of first refusal, or restriction of any kind, including any
restriction on use, voting, transfer, receipt of income, or exercise of any
other attribute of ownership.
"Environmental Law" means any Legal Requirement which relates
to or otherwise imposes liability or standards of conduct concerning mining or
reclamation of mined land, discharges, emissions, releases or threatened
releases of noises, odors or any pollutants, contaminants or hazardous or toxic
wastes, substances or materials, whether as matter or energy, into ambient air,
water or land, or otherwise relating to the manufacture, processing, generation,
distribution, use, treatment, storage, disposal, cleanup, transport or handling
of pollutants, contaminants, or hazardous or toxic wastes, substances or
materials including, but not limited to, the Comprehensive Environmental
Response Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Clean Air Act, the Federal Mine Safety Act of 1977, the Surface Mining
Control and Reclamation Act of 1977, and the Occupational Safety and Health Act
of 1970, all as amended, any regulations promulgated thereunder, and any
comparable state, local or foreign laws and regulations.
"Estimated Tax Credits" has the meaning specified in Section
2.01(e).
"Event of Bankruptcy" means, for any entity:
(a) that such entity shall fail generally to, or admit in
writing its inability to, pay its obligations as they become due; or
(b) a proceeding shall have been instituted in a court having
jurisdiction in the premises seeking a decree or order for relief in respect of
such entity in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or for the appointment of a
receiver, liquidator, assignee, trustee, custodian, sequestrator, conservator or
other similar official of such entity or for any substantial part of its
property, or for the winding-up or liquidation of its affairs and such
proceeding shall not have been dismissed, or such execution or similar process
shall not be released, vacated or fully bonded, within 60 days after
commencement, filing or levy, as the case may be; or
(c) the commencement by such entity of a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or such entity's consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
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sequestrator, conservator or other similar official of such entity or for any
substantial part of its property, or any general assignment for the benefit of
creditors.
"Final Adjustment Amount" means the adjustment to be paid on
the Final Adjustment Date which amount is to be determined under Section 2.02(b)
hereof.
"Final Adjustment Date" means June 30, 2008 (or, (i) if Tax
Credits are unavailable by reason of the repeal or amendment of Section 29 of
the Code, June 30 of the year following the year in which the Tax Credits are
last available as a result of such repeal or amendment, or (ii) if Tax Credits
are available beyond January 1, 2008, June 30 of the year following the year in
which the Tax Credits are last available).
"Final Determination" has the meaning specified in Section
2.01(j)(3).
"Governmental Body" means any of the following:
(a) nation, state, county, city, town, village, district,
or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other
government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or
entity and any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory,
or taxing authority or power of any nature.
"Initial Payment" means the return of the promissory note
referred to in Section 11.10 marked paid in full, or cancellation of such note.
"IRS" means the Internal Revenue Service or its successor.
"IRS Ruling" has the meaning ascribed thereto in the Company
Agreement.
"Lease" means the Deed of Ground Lease of even date herewith
by and between Seller and Upshur Property, Inc.
"Legal Requirement" means any federal, state, local,
municipal, foreign, international, multinational or other administrative (or
quasi-administrative) order, constitution, law, ordinance, principle of common
law, regulation, statute or treaty.
"Manager" means Covol Technologies, Inc. in its capacity as
manager of the Purchaser.
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"Maximum Tax Credit Amount at Risk" has the meaning specified
in Section 2.01(j)(4).
"Member" means the entities which are the Members of the
Purchaser.
"Operating Deficit" means, for any period, the amount, if any,
by which Cash Expenditures exceed Cash Receipts.
"Operating Gain" means, for any period, the amount, if any, by
which Cash Receipts exceed Cash Expenditures.
"Permitted Encumbrances" means (i) liens for taxes that are
not yet due and payable, (ii) liens that are being contested in good faith and
by appropriate proceedings which have the effect of staying the execution of
such liens, (iii) materialmen's, mechanic's, worker's, repairmen's, employees',
carriers', warehousemen's and other like liens relating to the construction of
the Project, so long as the same relate to amounts that are not more than thirty
days past due, and (iv) exceptions to title that are disclosed after the date
hereof to the Purchaser in the title policy relating to its lease of the land on
which the Project is located and which Purchaser reasonably determines (by
written notice within thirty days of receipt of the relevant title policy) do
not interfere with its use and enjoyment of the leasehold.
"Project" means the synthetic fuel production facility
developed and constructed by the Seller and described in Schedule II to the
Company Agreement.
"Purchaser" or "Partnership" means Mountaineer Synfuel,
L.L.C., a Delaware limited liability company.
"Purchase Price" has the meaning specified in Section 2.01(a).
"Qualified Fuels" means qualified fuels as defined in Section
29(c) of the Code.
"Quarterly Payment Date" means the date following the end of
each Calendar Quarter on which the Contingent Payment is due as provided in
Section 2.01(h).
"Reserves" means reserves established and maintained from time
to time by the Purchaser, in amounts deemed adequate and sufficient from time to
time by the Purchaser for working capital and to pay taxes, insurance, repairs,
replacements or renewals or other costs and expenses incident to the Purchaser's
business.
"Sale or Refinancing" means any sale or refinancing
transaction not in the ordinary course of business of Purchaser as more fully
described in the Company Agreement.
"Sale or Refinancing Proceeds" means all cash receipts of the
Purchaser arising from a Sale or Refinancing less those amounts described in the
Company Agreement.
"Seller" means Covol Technologies, Inc., a Delaware
corporation.
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"Tax Credits" means the tax credits provided by Section 29 of
the Code.
"Tax Credits Limit" means, for any calendar year, an amount
equal to the Tax Credits that would be generated by 480,000 tons of Qualified
Fuel (with each ton having a deemed energy content of 26 MMBtu) produced at the
Project owned by the Purchaser.
"Tax Event" has the meaning specified in Section 2.01(j)(2).
ARTICLE II
PURCHASE
Section 2.01. Sale and Purchase of Assets.
(a) On the Closing Date, subject to the terms and conditions
set forth in this Agreement, the Purchaser shall purchase and the Seller shall
sell, assign, transfer and convey the Assets. At the Closing, the Seller shall
deliver to the Purchaser an update to the Closing Date of Schedule 3.01 hereto.
The Seller shall retain, and shall discharge fully in accordance with their
terms, any and all liabilities related to any of the Assets, except for
liabilities under the Lease for the period after the Closing, which shall be
assigned to and assumed by the Purchaser. The Purchase Price of the Assets shall
include two components: (1) the Initial Payment and (2) Contingent Payments due
on each Quarterly Payment Date through and including the Quarterly Payment Date
which follows the Calendar Quarter ended on December 31, 2007 and on the Final
Adjustment Date.
(b) The Purchaser shall have the right to purchase the Assets
at any time on or before August 31, 1998 by giving written notice to such effect
to the Seller, which notice shall designate the Closing Date.
(c) Subject to the terms and conditions of this Agreement, at
the Closing with respect to the sale of the Assets, the Seller will, by bill of
sale, assignment and assumption agreement, and other appropriate documentation
and actions, sell, assign, transfer and convey all of the Seller's rights, title
and interest in the Assets to the Purchaser and the Purchaser will purchase,
assume and accept the Assets from the Seller and will pay for the Assets, the
Initial Payment and all of the Contingent Payments as they become due. On the
Closing Date, all right, title and interest of the Seller in the Assets shall be
transferred, assigned and conveyed to the Purchaser and all interest of the
Seller in the Assets shall be released by the Seller.
(d) On the Closing Date, the Purchaser shall pay in full in
immediately available funds the Initial Payment.
(e) The Purchaser shall, as further consideration for the
Assets purchased hereunder, be required to make and agrees to make Contingent
Payments to the Seller in the amounts set forth in this Section 2.01(e). The
Contingent Payments shall be due and payable on
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each Quarterly Payment Date and on the Final Adjustment Date. The Contingent
Payments in respect of the Assets shall commence on the Quarterly Payment Date
immediately following the Calendar Quarter in which the first Qualified Fuel
produced by the Project is sold and end with the Final Adjustment Date. Subject
to Article IX hereof, with respect to each Calendar Quarter, the Contingent
Payment due on the Quarterly Payment Date immediately following such Calendar
Quarter shall be an amount equal to (i) 16.7% of the aggregate Estimated Tax
Credits generated by the Project during such Calendar Quarter and (ii) with
respect to the Contingent Payment due on the Adjustment Date, plus or minus the
Annual Adjustment Amount. The term "Estimated Tax Credits," for any Calendar
Quarter, as used in this Agreement, means the sum of the Tax Credits, as
determined in accordance with Section 3.1(e) of the Company Agreement; and, as
adjusted following review by the Seller as provided herein and by the Members'
Accountant as provided in Section 3.1(f) of the Company Agreement; provided,
however, that for purposes of calculating Contingent Payments, Estimated Tax
Credits for any calendar year shall not exceed the Tax Credits Limit.
Notwithstanding the foregoing, the Seller agrees that the Purchaser shall not
have any obligation to make any Contingent Payment for the Assets unless and
until the date the conditions set forth in Section 3.1(g) in the Company
Agreement have been satisfied or waived.
(f) The final Contingent Payment shall be due on the Final
Adjustment Date and shall be in the amount of the Final Adjustment Amount if
such Final Adjustment Amount is a positive amount.
(g) The Manager shall prepare its calculation of the Estimated
Tax Credits and the Contingent Payment for each Calendar Quarter at the same
time that the Manager prepares its calculation of the amount of the Quarterly
Contribution as provided in Section 3.1(e) of the Company Agreement and shall
submit a report showing the Purchaser's determination of the Contingent Payment
to the Seller at the same time as the Manager submits the report described in
Section 3.1(f) of the Company Agreement to the Members' Accountant for review.
(h) The Contingent Payment with respect to each Calendar
Quarter shall be due to the Seller not later than five days after the Quarterly
Contribution for such Calendar Quarter is due to the Purchaser from the Members
under the terms of Section 3.1(f) of the Company Agreement. Such due date for
Contingent Payments, being the date which is five days after the Quarterly
Contribution Date, is herein referred to as the "Quarterly Payment Date."
(i) If the Seller objects to the Manager's calculation of any
Contingent Payment, the Seller shall notify the Purchaser within two weeks after
the Purchaser has submitted the report to the Seller. If the Seller disputes the
Purchaser's calculations, the Purchaser shall, in good faith, consider the
issues raised or in dispute and discuss such issues with the Seller and attempt
to reach a mutually satisfactory agreement, taking into account as well, any
issues raised by the Members' Accountant and if such dispute is promptly
resolved, the adjusted amount agreed upon shall be the Contingent Payment due.
If the dispute is not promptly resolved, the Purchaser shall pay, on the
Quarterly Payment Date, the amount not in dispute. Thereafter, the Seller, the
Manager and the Members' Accountant shall promptly select an independent entity
qualified and knowledgeable in the area who shall be instructed to resolve the
dispute promptly and, upon resolution of the dispute, if it is determined that
additional Quarterly Contributions are
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due from the Members, the corresponding additional amount shall be paid to the
Seller within ten days of the date of such determination, together with interest
thereon from the date sixty days after the relevant Quarterly Payment Date, at
the rate of 6% per annum.
(j) (1) If the Purchaser advises the Seller in writing that a
Tax Event has occurred, all payments of Contingent Payments thereafter up to an
amount equal to the aggregate Maximum Tax Credit Amount at Risk shall be made
into an escrow account for the benefit of the Seller (but owned by the
Purchaser) at a bank or trust company of national standing, on terms whereby the
amounts held in escrow will be released on the joint signatures of the Seller
and the Purchaser (which shall require the approval of a Majority in Interest of
the Members, as such term is defined in the Company Agreement) in the following
circumstances, and in the following amounts:
(i) upon a Final Determination with respect to a
Member or Members and a Calendar Quarter or Calendar Quarters that Tax
Credits are disallowed, the product of (x) the sum of (I) the amount
disallowed, plus (II) any interest and penalties (including without
limitation substantial understatement penalties and any penalties for
underpayment of estimated taxes to the extent attributable to Tax
Credits arising from the Purchaser) due with respect to any such
Calendar Quarters related to such Tax Credits, multiplied by (y) the
applicable percentage under Section 2.01(e) hereof shall be released
from the escrow to the relevant Member or Members so long as the
relevant Member or Members certifies that (A) the amount being released
is in the same proportion as the amounts escrowed hereunder bear to all
amounts placed into escrow following a Tax Event under this Agreement
and the Technology License and Binder Purchase Agreement and (B) all
actions necessary to cause the proportionate amounts escrowed under the
Technology License and Binder Purchase Agreement to be released have
been taken or are being taken contemporaneously; and
(ii) if there is no longer an extant Tax Event as
determined in accordance with the final sentence of paragraph (2)
below, the amounts remaining in escrow after application of (i) above
shall be released to the Seller.
(2) For purposes of this Agreement, "Tax Event" means (i) the
issuance of any information document request related to Tax Credits arising from
the operations of the Purchaser, or any other reasonable indication of an
intention by the IRS to examine or disallow any portion of such Tax Credits, but
in each case only if the IRS continues to make inquiries or persists in its
examination after the IRS has received a response to its first such inquiry or
been provided with a copy of the private letter ruling(s) issued to the
Purchaser, (ii) the Purchaser or Seller becoming aware that the IRS has
questioned or otherwise implicated the ability of the proprietary process
licensed under the Technology License and Binder Purchase Agreement to produce
Qualified Fuels at any other synthetic fuel production project, or (iii) except
with respect to matters addressed in clause (i) or (ii) above, a Member having a
Percentage Interest of at least 45% reasonably determines, after consultation
with Seller, that it is more likely than not that the IRS will disallow all or a
portion of Tax Credits. Any Tax Event arising under this Section 2.01(j)(2)
shall cease on the earlier of (A) a Final Determination, (B) when the Purchaser
(with the approval of a Majority in Interest of the Members or, if a Member
objecting to the same delivers an
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opinion of nationally recognized tax counsel that it is more likely than not
that the IRS will disallow Tax Credits, with the approval of all the Members)
and the Seller agree that the tax issue giving rise to the Tax Event has been
resolved, or (C) solely with respect to a Tax Event arising under clause (iii)
above, more than one year passes without an examination of Tax Credits of the
Partnership commencing or another Tax Event occurring.
(3) For purposes of this Agreement, "Final Determination"
means, with respect to Tax Credits related to the Purchaser,
(i) unless an adjustment is proposed with
respect to any such Tax Credits, the expiration of the
applicable statute of limitations;
(ii) unless an administrative appeal or a
judicial proceeding is initiated by the Purchaser or the
affected Member, the date ninety days after the issuance of a
notice of deficiency;
(iii) unless judicial proceedings are
initiated by the Purchaser or the affected Member, a final
decision with respect to the proposed adjustment by an IRS
appeals officer, as evidenced by the issuance of a 90-day
letter, 870-AD or like notice and the expiration of the period
for initiating judicial proceedings;
(iv) unless appealed by the Purchaser or the
affected Member, a final decision with respect to the proposed
adjustment by the United States Tax Court, Court of Federal
Claims or the appropriate Federal District Court and the
expiration of the period for filing an appeal of such
decision;
(v) a final decision of a United States
Court of Appeals with respect to the proposed adjustment,
unless a petition for certiorari to the United States Supreme
Court has been applied for and is pending or has been granted
with respect to such decision;
(vi) denial of certiorari by, or final
decision of, the United States Supreme Court; or
(vii) the settlement of a proposed
adjustment as evidenced by a closing agreement.
(4) For purposes of this Agreement, "Maximum Tax Credit Amount
At Risk" means the amount reasonably determined by any affected Member to be
potentially subject to disallowance by the IRS following a Tax Event, plus
interest and substantial understatement penalties, which amount shall not exceed
the product of (x) the sum of (I) the Tax Credits claimed by such Member with
respect to the operations of the Purchaser for all open tax years (so long as
such claims are consistent with the applicable final tax return of the Purchaser
as to any such tax year), it being understood that such amount is not limited to
amounts directly implicated by the Tax Event (since an audit of one issue
related to Tax Credits could result in a disallowance of other such credits for
the same or a subsequent period, or on other grounds discovered later),
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plus (II) any interest and penalties payable by such affected Member (to the
extent attributable to Tax Credits arising from the Partnership), multiplied by
(y) the applicable percentage under Section 2.01(e) hereof.
(5) Each of the Seller and the Purchaser agrees that, promptly
after obtaining knowledge thereof, it will give prompt notice of any matter that
is or could become a Tax Event or that the IRS has commenced an examination of
any other synthetic fuel production project utilizing the proprietary process
licensed under the Technology License and Binder Purchase Agreement, and the
parties as promptly thereafter as practicable shall meet to discuss in good
faith whether a Tax Event in fact exists or will likely occur and the
consequences thereof; provided, however, that neither party shall be required to
make any disclosures prohibited under contractual obligations related to
synthetic fuel production projects or under applicable law.
Section 2.02. Adjustment Amounts.
(a) Each year, following the publication by the IRS of the
revised inflation adjustment factor and the reference price, and following the
filing of the Purchaser's federal income tax return (A) the Estimated Tax
Credits for each Calendar Quarter of the preceding calendar year shall be
recomputed, using such revised factor and taking into account the effect of the
operation of Section 29(b)(1) of the Code based on such reference price, but
otherwise using the same information used to determine the Estimated Tax Credits
for such periods, except as necessary to cause the aggregate Estimated Tax
Credits to equal the Tax Credits actually reported on the Purchaser's federal
income tax return; and (B) the Estimated Tax Credits for the first Calendar
Quarter of the then current calendar year shall be recomputed using such revised
inflation adjustment factor. The Manager shall then determine the difference
between (x) the Estimated Tax Credits for the preceding calendar year and the
first Calendar Quarter of the current calendar year, as recomputed using the
revised information as set forth in this Section 2.02(a) and (y) the Estimated
Tax Credits as originally determined for the four Calendar Quarters in the
preceding calendar year and the first Calendar Quarter of the current calendar
year. (In the event the Company's federal income tax return is amended for any
year, the Adjustment Amount first following the filing of such amended return
shall be increased or decreased to reflect changes in the tax credits claimed on
such amended return, using the principles of the preceding sentence.) The
product of (I), the difference between (x) and (y) in the preceding sentence,
multiplied by (II) the applicable percentage under Section 2.01(e) hereof, is
the "Annual Adjustment Amount." If the Annual Adjustment Amount is a positive
amount, it shall be added to the amount of the Contingent Payment otherwise due
on the Adjustment Date and if the Annual Adjustment Amount is a negative number,
such amount shall be used to reduce the Contingent Payment otherwise due on the
Adjustment Date, or if the Annual Adjustment Amount is negative and exceeds the
amount of the Contingent Payment otherwise due on such date, the excess amount
shall be successively credited against Contingent Payments as they otherwise
become due thereafter.
(b) In the calendar year in which the Final Adjustment Date
occurs, following the publication of the revised inflation adjustment factor and
the reference price applicable to the immediately preceding calendar year and
following the filing of the Partnership's federal income tax return, the
Estimated Tax Credits for each Calendar Quarter of such immediately preceding
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calendar year shall be recomputed, using such revised factor and taking into
account the effect of the operation of Section 29(b)(1) of the Code based on
such reference price, but otherwise using the same information used to determine
the Estimated Tax Credits for such periods, except as necessary to cause the
aggregate Estimated Tax Credits to equal the Tax Credits actually reported on
the Purchaser's federal income tax return. The Manager shall then determine the
difference between (x) the Estimated Tax Credits for such calendar year as
recomputed using the revised information as set forth in this Section 2.02(b)
and (y) the Estimated Tax Credits as originally determined for the four Calendar
Quarters in such calendar year. The product of (I), the difference between (x)
and (y) in the preceding sentence, multiplied by (II) the applicable percentage
under Section 2.01(e) hereof (determined based on the Project in respect of
which the Tax Credits were generated), is the "Final Adjustment Amount." The
Final Adjustment Amount, if positive, shall be due from the Purchaser to the
Seller as the final Contingent Payment on the Final Adjustment Date. If the
Final Adjustment Amount is negative, the amount thereof shall be paid by the
Seller to the Purchaser on the Final Adjustment Date.
Section 2.03. Deferred Contingent Payments. (a) To the extent,
for any Calendar Quarter, the Purchaser experiences an Operating Deficit, the
Purchaser, with respect to the Contingent Payment due on the Quarterly Payment
Date following such Calendar Quarter, shall be permitted to defer payment of the
Contingent Payment due on such date up to the amount of the Operating Deficit
for such Calendar Quarter. Any such amount deferred as provided in this Section
2.03 together with interest thereon is herein referred to as a "Deferred
Contingent Payment." Any amount of a Contingent Payment which is deferred shall
continue as an obligation of the Purchaser and shall bear interest at the rate
of six percent per annum, compounded annually, until paid. If, for any Calendar
Quarter, the Purchaser experiences an Operating Gain and there are Deferred
Contingent Payments outstanding, the Purchaser shall, on or before the Quarterly
Payment Date immediately following such Calendar Quarter, pay to the Seller the
lesser of (i) the amount of such Operating Gain for the Calendar Quarter and
(ii) the aggregate amount of unpaid Deferred Contingent Payments including
accrued and unpaid interest. Any payments made with respect to Deferred
Contingent Payments shall be credited first to accrued and unpaid interest, and
then to the principal amount of the unpaid Deferred Contingent Payments. All
Deferred Contingent Payments not paid prior to such date shall become due and
payable and shall be paid to the Seller on August 1, 2008. The Purchaser agrees
that, to the extent it sells assets, the Sale or Refinancing Proceeds will be
used first to pay any unpaid Deferred Contingent Payments before such amounts
are used for any other purpose of the Purchaser. The obligation of the Purchaser
to pay the Deferred Contingent Payment shall be evidenced by a promissory note
substantially in the form of Exhibit B hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser, as
of the date hereof and as of the Closing Date, as follows:
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Section 3.01 Assets. Set forth on Schedule 3.01 hereto is an
identification of all of the tangible and intangible assets which comprise (or,
for purposes of Schedule 3.01 delivered on the date of this Agreement, but not
Schedule 3.01 to be updated and delivered on the Closing Date as provided in
Section 2.01(a) hereof, when constructed and completed, will comprise) the
Project; which assets, collectively, are all of the assets necessary to operate
the Project so as to achieve results equal at least to the Base Case. All of the
tangible assets set forth on Schedule 3.01 are in good condition and repair,
ordinary wear and tear excepted, and the Seller has good and marketable title
(or a valid leasehold interest in, as relevant) to all of such assets, free and
clear of Encumbrances except Permitted Encumbrances.
Section 3.02. Ownership of Assets. The Seller (a) is the
owner, free and clear of any Encumbrances, of the Assets, and (b) subject to the
terms and conditions of this Agreement, will sell, transfer, assign and deliver
good and valid title to the Assets and relinquish all rights with respect
thereto. At the Closing the Purchaser will acquire good and valid title to the
Assets, free and clear of any Encumbrances.
Section 3.03. Organization; Due Authorization; Binding
Obligation. The Seller is a Delaware corporation having all requisite power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance by the
Seller of this Agreement have been duly authorized by all necessary action on
its part. This Agreement has been duly and validly executed and delivered by the
Seller. This Agreement is the valid and binding obligation of the Seller,
enforceable in accordance with its terms, subject to the qualification, however,
that enforcement of the rights and remedies created hereby is subject to
bankruptcy and other similar laws of general application relating to or
affecting the rights and remedies of creditors and that the remedy of specific
enforcement or of injunctive relief is subject to the discretion of the court
before which any proceeding therefor may be brought.
Section 3.04. Absence of Certain Changes or Events. Since
January 1, 1998, there has not been any material adverse change in the
properties, assets, business, financial condition or results of operations of
the Seller as they relate to the Project.
Section 3.05. Insurance. The assets, business and operations
of the Seller are insured in accordance with prudent industry practices with
respect to loss due to casualty and other risks, in amounts and coverages
reasonable in the circumstances. Schedule 3.05 attached hereto sets forth a
complete and accurate list of all casualty, directors and officers liability,
general liability (including product liability) and other types of insurance
maintained by the Seller that relate to the Project, together with the carriers
and liability limits for each such policy. Each policy is in full force and
effect, there are no defaults or conditions which with the passage of time, the
giving of notices or both, would become defaults under any such policies, and no
written or oral notice has been received by the Seller from any insurance
carrier purporting to cancel or reduce coverage under any such policy. The
Seller is current in all premiums or other payments due thereunder.
Section 3.06. Commitments. Schedule 3.06 attached hereto sets
forth a complete and accurate list of all agreements, contracts, leases (whether
of real or personal property),
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options, commitments, arrangements and understandings, whether oral or written
(including any and all amendments thereto) to which Seller is a party and which
relate to the Project, including, but not limited to, (a) licenses for
technology, (b) agreements for the purchase of feedstock and other raw
materials, (c) operating agreements, (d) engineering procurement and
construction contracts, (e) management services agreements, (f) employment
contracts and contracts with consultants and other independent contractors, (g)
contracts with Affiliates and (h) all other material contracts. All such
contracts, agreements, leases, commitments, arrangements or understandings are
on commercially reasonable and arms-length terms, and the sale of Assets will
not constitute a breach or default under any such contracts. To the knowledge of
Seller neither the Seller nor any of the other parties thereto is in default,
thereunder and, to the knowledge of the Seller, no event has occurred which with
the giving of notice or the lapse of time or both would constitute a default,
under any such agreements, contracts, leases, commitments, arrangements or
understandings.
Section 3.07. Legal Proceedings. Except as disclosed in
filings under the Securities Exchange Act of 1934, the Seller is not engaged in
and is not a party to, or, to the Seller's knowledge, threatened with, any suit,
investigation, legal action or other adverse proceeding, before any court,
administrative agency, arbitration panel or other similar authority (whether or
not covered by insurance), and there is no outstanding order, ruling, decree,
judgment or stipulation by or with any court, administrative agency, arbitration
panel or other similar authority, or any litigation pending or, to the Seller's
knowledge, threatened, against the Seller.
Section 3.08. Taxes. All federal, state and local tax returns,
reports, declarations, statements and other documents required to be filed by or
with respect to the Seller in respect of all taxes, including income, franchise,
sales, property, payroll and other taxes, levies, imposts and duties of any
nature whatsoever ("Taxes") have been filed with the appropriate tax
authorities, such documents are true, accurate and complete in all material
respects and all amounts shown by such documents to be due and payable have been
paid. Seller has no liability for taxes, or for any interest or penalties in
respect thereof which, if due and payable, have not been paid or will not be
paid at or prior to the Closing. There are no pending, or to the Seller's
knowledge, threatened, claims or assessments against Seller in respect of Taxes,
or interest or penalties, other than claims or assessments for which adequate
reserves have been provided.
Section 3.09. Compliance with Laws. (a) Seller has complied in
all material respects, and is now in compliance in all material respects, with
all federal, state and local laws, ordinances and regulations applicable to it
on or prior to the date of this Agreement, (b) those governmental permits,
licenses and other authorizations required to be obtained or waived in
connection with further development, construction, equipping and operation of
the Project are set forth on Part B of Schedule 3.09 attached hereto, (c) no
written claims or written complaints from any Governmental Body or other parties
have been received by Seller and, to the knowledge of the Seller, none is
threatened, to the effect that Seller is in violation of any applicable
building, zoning, occupational safety and health, or similar law, ordinance or
regulation which relate to the Project or of any applicable fair employment,
equal opportunity or similar law, ordinance or regulation, and (d) Seller has
not received written or oral notice from any Governmental Body of any pending
proceedings to take all or any part of the properties of the Seller (whether
leased or
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owned) which relate to the Project by condemnation or right of eminent domain
and, to the knowledge of the Seller, no such proceedings are threatened. Part A
of Schedule 3.09 sets forth all material governmental permits, licenses and
authorizations with respect to the Project obtained to the date of this
Agreement.
Section 3.10. Environment.
(a) The Seller possesses, or has the use and benefit of
through its respective Project Contracts, all permits, licenses and
authorizations required by any existing Environmental Law to construct, own and
operate the Project as contemplated in the Base Case, except as set forth in
Part B of Schedule 3.10, and is in compliance with all applicable Environmental
Laws in effect as of the date hereof and, no condition exists or event has
occurred which would constitute or give rise to any material non-compliance
under any applicable Environmental Law affecting, or which may affect the
Project, the leasehold on which the Project is situated or the Purchaser as the
owner of the Project or as the lessee of such leasehold. Except as set forth on
Part B of such Schedule 3.13, the Purchased Companies are not required to obtain
any additional permits, licenses or authorizations under any applicable
Environmental Law.
(b) The Seller has timely filed all reports and notifications,
if any, required to be filed on or prior to the date of this Agreement with
respect to its properties and facilities and has generated and maintained all
records and data, if any, required prior to the date of this Agreement under all
applicable Environmental Laws.
Section 3.11. Non-Contravention. The execution, delivery and
performance of this Agreement by the Seller and the consummation by the Seller
of the transactions contemplated hereby do not and will not, with or without the
giving of notice or the lapse of time, or both, violate, conflict with, result
in the breach of or accelerate the performance required by any of the terms,
conditions or provisions of any covenant, agreement or understanding to which
the Seller is a party or any order, ruling, decree, judgment or arbitration
award, or any law, rule, regulation or stipulation, to which the Seller is
subject or constitute a default thereunder or result in the creation of any
lien, charge or encumbrance upon any of the properties or assets of Seller,
other than violations, conflicts, breaches, accelerations, defaults, liens,
charges or encumbrances which are not material.
Section 3.12. Regulatory Approvals. The Seller is not required
to file, seek or obtain any governmental notice, filing, authorization,
approval, order or consent, or any bond in satisfaction of any governmental
regulation in connection with the execution, delivery and performance of this
Agreement by the Seller.
Section 3.13. Conduct of Operations. The business and
operations of Seller as they relate to the Project have been conducted (a) in a
prudent and commercially reasonable manner, and (b) in compliance with all
applicable federal, state and local laws including, without limitation, such
laws relating to coal mine health and safety and other laws relating to or
affecting coal mine activity and labor and employment matters. All existing
contracts or commitments of Seller for the purchase of goods or services as they
relate to the Project are on
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terms which are commercially reasonable, arms-length and commensurate with the
goods or services provided or to be provided.
Section 3.14. Designs and Drawings. The Project, if
constructed in accordance with the designs and construction drawings in respect
thereof, will have the operational capabilities to produce Qualified Fuels of a
quality expected to satisfy the requirements of the marketplace for synthetic
coal-based fuels, and the capacities to produce Qualified Fuels on an annual
basis as contemplated in the Base Case.
Section 3.15. Licenses, Permits, Etc. All licenses, permits
and other governmental approvals and all private consents which have been
obtained in connection with the construction and operation of the Project
(including without limitation those required under Environmental Laws) are set
forth in Part A of Schedule 3.09; all such licenses, permits, approvals and
consents are in full force and effect, there are no breaches or defaults by the
Seller under any thereof, or conditions which with the passage of time or the
giving of notice or both would give rise to such a breach or default, each
thereof my be assigned to Purchaser to undue delay or expense and the sale of
Assets as contemplated under this Agreement will not result in a breach or
default or require further consent under the terms thereof, other than any
breach or default that could not reasonably be expected to have a material
adverse effect on Seller. The Seller reasonably expects that all additional
licenses, permits, other governmental approvals and private consents that are
necessary or advisable for the construction of, operation of, and sale of
synthetic coal-based fuels produced by, the Project will be obtained without
undue delay or expense so as to permit the Project to meet the requirements of
Section 3.1(g) of the Company Agreement and operate so as to produce Qualified
Fuel as contemplated in the Base Case.
Section 3.16. No Tax-Assisted Financing. None of the following
exist with respect to the Project: (i) grants described in Section
29(b)(3)(A)(i) of the Code; (ii) proceeds of issues of State or local government
obligations described in Section 29(b)(3)(A)(ii) of the Code; or (iii)
subsidized energy financing described in Section 29(b)(3)(A)(iii) of the Code.
Section 3.17. IRS Ruling. The representations made by the
Purchaser and its representatives in applying for the private letter ruling
expected to be issued to the Purchaser were (and any future such representations
will be) correct in all material respects, and reflected (and will reflect) an
accurate statement of the material facts. The only written submissions to the
IRS and the only written communications from the IRS in the course of such
request are listed on Schedule 3.24. The Seller is not aware of any fact which
would render it unable to rely upon the IRS Ruling, or that would permit the IRS
to revoke or modify, prospectively or retroactively, in whole or in part, the
IRS Ruling, in any manner adverse to the Seller. Seller has not taken any action
inconsistent with the IRS Ruling in connection with the Project. This
representation and warranty shall be made only at the Closing Date. The
Purchaser acknowledges that before the date hereof an application for a private
letter ruling was submitted to the IRS and is about to be withdrawn; this
representation and warranty is to be made without regard to that application.
Section 3.18. Certain Expectations. The Seller reasonably
expects that the Project will be able to be completed, and will be completed, in
accordance with the requirements of Section 3.1(g) of the Company Agreement and
will be able to be operated and will be operated
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at a level of operations at least equal to the Base Case and consistent with
(but without limitation of) that expectation, the Seller reasonably believes
that:
(a) there are no material physical, contractual or legal
impediments to the construction of any Project in accordance with the
requirements of Section 3.1(g) of the Company Agreement and the operation of the
Project as contemplated in the Base Case;
(b) Purchaser has, or will have at the time reasonably
required consistent with the requirements of Section 3.1(g) of the Company
Agreement and the Base Case, full right and entitlement to possess, use and
conduct operations on the properties on which the Project is located;
(c) all necessary or advisable rights of easement, access,
ingress and egress, and transportation arrangements to and from the Project site
will be able to be obtained without undue delay or cost, and in order to permit
the Project to be constructed substantially in accordance with the requirements
of Section 3.1(g) of the Company Agreement and to be operated substantially in
accordance with the Base Case;
(d) there will be available to Purchaser sufficient coal fines
and other feedstock to meet the requirements of the IRS Ruling and to produce
Qualified Fuels in the quantities and with the quality contemplated in the Base
Case;
(e) the production and sale of Qualified Fuels by the Project,
and the Tax Credits resulting therefrom, will be substantially consistent with
the Base Case;
(f) Purchaser will be able to produce Qualified Fuels
substantially in accordance with the Base Case and in compliance with the IRS
Ruling and the requirements of the marketplace for synthetic coal-based fuels;
and
(g) the Covol technology as used in the Project is able to
produce Qualified Fuels in compliance with the requirements of the IRS Ruling
and the requirements of the marketplace for synthetic coal-based fuels.
The references in this Section 3.18 to the IRS Ruling shall be
a part of the representations and warranties only at the Closing Date, and not
at the date hereof.
Section 3.19. Projections. The Base Case is based on
reasonable assumptions, and the Seller reasonably believes that the Purchaser
will be able to pay Deferred Contingent Payments, if any, when due.
Section 3.20. Production Capacity of Synthetic Coal
Facilities. Assuming completion of the applicable synthetic fuel production
facility in accordance with the terms of the Design and Construction Agreement
and operation thereof by a qualified operator, the Project will, in at least two
consecutive Calendar Quarters occurring between the date hereof and December 31,
2000, be capable of producing at least 85,000 tons of Qualified Fuels in the
aggregate in compliance with the IRS Ruling. The failure of the Project to
produce at least
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85,000 tons of Qualified Fuels in compliance with the IRS Ruling within such
period shall create a presumption that the representation and warranty in this
Section 3.20 has been breached; provided, however, that the presumption may be
rebutted by clear and convincing evidence that such failure was the result of
operations, it being the intent of the parties that this representation is a
representation as to design, equipment and capacity.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller as
follows:
Section 4.01. Organization. The Purchaser is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Delaware, with all requisite power and authority to own
and operate its business and properties and to consummate the transactions
contemplated hereby.
Section 4.02. Due Authorization of the Purchaser; Binding
Obligation. The Purchaser has all requisite power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by the Purchaser of
this Agreement has been duly authorized by all necessary action on the part of
the Purchaser. This Agreement has been duly and validly executed and delivered
by the Purchaser. This Agreement including, but not limited to, the obligation
to pay the Initial Payment, each Contingent Payment and all Deferred Contingent
Payments, is the valid and binding obligation of the Purchaser, enforceable in
accordance with its terms, subject to the qualification, however, that
enforcement of the rights and remedies created hereby is subject to bankruptcy
and other similar laws of general application relating to or affecting the
rights and remedies of creditors and that the remedy of specific enforcement or
of injunctive relief is subject to the discretion of the court before which any
proceeding therefor may be brought.
Section 4.03. Non-Contravention. The execution, delivery and
performance of this Agreement by the Purchaser and the consummation by the
Purchaser of the transactions contemplated hereby do not and will not, with or
without the giving of notice or the lapse of time, or both, violate, conflict
with, result in the breach of or accelerate the performance required by any of
the terms, conditions or provisions of the Purchaser Agreement or any covenant,
agreement or understanding to which the Purchaser is a party or any order,
ruling, decree, judgment or arbitration award or, subject to the filings,
registrations and notices referred to in Section 4.04, any law, rule, regulation
or stipulation, to which the Purchaser is subject or constitute a default
thereunder or result in the creation of any lien, charge or encumbrance upon any
of the Purchaser's properties or assets.
Section 4.04. Regulatory Approvals. The Purchaser is not
required to file, seek or obtain any governmental notice, filing, authorization,
approval, order or consent or bond in satisfaction of any governmental
regulation, in connection with the execution, delivery and performance of this
Agreement by the Purchaser.
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Section 4.05. Legal Proceedings. There is no outstanding
order, ruling, decree, judgment or stipulation, or any litigation pending or, to
the Purchaser's knowledge, threatened against the Purchaser which would have a
material adverse effect on the ability of the Purchaser to perform its
obligations under this Agreement, or which seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated hereby.
Section 4.06. Availability of Funds. The Purchaser will have
available to it on the Closing Date sufficient funds to enable it to consummate
the transactions contemplated by this Agreement.
ARTICLE V
FURTHER AGREEMENTS AND ASSURANCES
Section 5.01. Confidentiality. If the transactions
contemplated by this Agreement shall be consummated, the Seller agrees that it
shall, and shall cause each of its agents, representatives and employees to, for
a period of three years following the final Closing Date hereunder (a) maintain
in confidence any and all proprietary and confidential information concerning
the Purchaser and (b) refrain from using any such information for its own
benefit or in competition with or otherwise to the detriment of the Purchaser.
It is understood that the Seller shall not have liability hereunder for
disclosure or use of any such information which (i) is in or, through no fault
of the Seller, its agents, representatives or employees, comes into the public
domain, or (ii) was acquired by the Seller from other sources after the Closing,
provided such sources are not, to the knowledge of the Seller, prohibited from
disclosing such information by legal, contractual or fiduciary obligation to the
Purchaser, any affiliate of the Purchaser, or (iii) the Seller is legally
required to disclose. In the event that the Seller becomes compelled by legal or
administrative process to disclose any of such information, the Seller will
provide the Purchaser with prompt notice so that the Purchaser may seek a
protective order or other appropriate remedy and/or waive compliance with the
provisions of this Section 5.01. In the event that such protective order or
other remedy is not obtained, or that the Purchaser waives compliance with the
provisions of this Section 5.01, the Seller will furnish only that portion of
such information which the Seller is advised, by opinion of counsel, is legally
required and will exercise reasonable efforts, at the Purchaser's expense, to
obtain reliable assurance that confidential treatment will be accorded such
information. Nothing herein shall be construed as prohibiting the Seller from
using such information in connection with (i) any claim against the Seller
hereunder, (ii) any third party claims for which the Purchaser is seeking
indemnification from the Seller hereunder and (iii) any exercise by the Seller
of any of its or his rights hereunder.
Section 5.02. Reports and Financial Statements. The Purchaser
will prepare (a) quarterly reports of synthetic fuel produced, and synthetic
fuel sold to unaffiliated third parties, (b) quarterly reports of Cash Receipts
and Cash Expenditures (c) quarterly statements showing the calculation of
Estimated Tax Credits and, for the applicable Calendar Quarters, the Annual
Adjustment Amount and the Final Adjustment Amount and (d) annual financial
statements, including statements of cash flows. Such annual financial statements
shall be prepared in accordance with generally accepted accounting principles.
The Purchaser shall provide the Seller
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with copies of all such reports within a reasonable time after the end of each
Calendar Quarter but not later than the submission of the report described in
Section 3.1(f) of the Company Agreement to the Members' Accountant and all such
financial statements within 90 days after the end of each calendar year. The
Purchaser shall, at the reasonable request of Seller from time to time, make
available promptly to Seller, and to make the calculations required by Sections
3 and 4 of such Transfer Agreements, provided that any such additional data
shall be so made available only on conditions that do not involve cost to the
Purchaser.
Section 5.03. Concerning the Project. The Seller shall (a) use
commercially reasonable efforts to cause the Project to be developed,
constructed and placed in commercial operation and to do so at an overall cost
not to exceed the cumulative aggregate budgeted development cost set forth in
Exhibit B to the Company Agreement, (b) supervise, monitor and direct the
development and construction of the Project and the placing of the Project into
service and shall, on commercially reasonable terms, procure all contracts and
agreements appropriate for such development, construction and placing in
service, and (c) proceed generally with due diligence to cause the Project to be
completed and placed in service and to meet the requirements of Section 3.1(g)
(other than clause (iii) thereof) of the Company Agreement.
ARTICLE VI
CONDITIONS TO THE PURCHASE
The Purchaser's purchase of the Assets is subject to the
satisfaction or waiver on or prior to the Closing Date on which the Assets are
purchased of the following conditions (provided that, if the Purchaser pays the
Initial Payment for the Assets, such payment shall constitute conclusive
evidence that each of the following conditions has been satisfied or waived):
Section 6.01. No Legal Proceedings. No Governmental Body shall
have commenced any administrative or judicial proceeding to restrain or prohibit
or otherwise challenge the transactions contemplated by this Agreement and, in
the case of any action commenced by other than a Governmental Body, no
preliminary or permanent injunctive order issued by any United States federal or
state court of competent jurisdiction which prevents the consummation of the
transactions contemplated by this Agreement shall have been issued and remain in
effect.
Section 6.02. Project Contracts. The Purchaser shall have
entered into the Project Contracts, each of which shall be in full force and
effect and there shall be no default under any thereof, and no condition which
with the passage of time or giving of notice might become such a default.
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ARTICLE VII
CONDITIONS TO THE SALE
The sale by the Seller of the Assets hereunder is subject to
the satisfaction, or waiver on or prior to the Closing Date with respect to the
sale of Assets of the following conditions (provided that, if the Seller
executes and delivers such documents as the Purchaser reasonably requests to
evidence the Seller's transfer of the Assets, such execution and delivery shall
constitute conclusive evidence that each of the following conditions has been
satisfied or waived):
Section 7.01. No Legal Proceedings. No Governmental Body shall
have commenced any judicial proceeding to restrain or prohibit or otherwise
challenge the transactions contemplated by this Agreement and, in the case of
any action commenced by other than a Governmental Body, no preliminary or
permanent injunctive order issued by any United States federal or state court of
competent jurisdiction which prevents the consummation of the transactions
contemplated by this Agreement shall have been issued and remain in effect.
Section 7.02. Payment of Purchase Price. The Purchaser shall
have tendered for delivery to the Seller the amount required by Section 2.01 as
the Initial Payment due at Closing.
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.01. Events of Default. Upon the occurrence and
continuance of any of the following events (each an "Event of Default"):
(a) Payments by the Purchaser. Failure by the Purchaser to pay
in full (i) any Contingent Payment due herein on the Contingent Payment
Date (except to the extent such payment may be deferred under the terms
of Section 2.03 of this Agreement) and continuation of such failure for
five days after the Contingent Payment Date, (ii) failure to pay any
Deferred Contingent Payment when due under the terms of Section 2.03 of
this Agreement or (iii) failure by the Purchaser to pay the Final
Adjustment Amount, if positive, on the Final Adjustment Date; or
(b) Bankruptcy Proceedings of the Purchaser. There shall occur
an Event of Bankruptcy with respect to the Purchaser or the Manager;
provided that, if such Event of Bankruptcy involves involuntary
proceedings against the Purchaser or the Manager, no Event of Default
hereunder shall occur unless such proceeding or petition shall not be
dismissed, or such execution or similar process shall not be released,
vacated or fully bonded, within sixty (60) days after commencement,
filing or levy, as the case may be or
(c) Covenants by the Purchaser. Failure by the Purchaser to
observe or perform (i) any of the covenants or agreements in Section
5.02 hereof or (ii) any other covenant or
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agreement contained herein and not constituting an Event of Default
under any other clause of this Article VIII; provided, that such
failure shall have continued for 60 days after the Seller shall have
given written notice of such failure to the Purchaser;
then, at any time during the continuance of any Event of Default, except as
provided by Section 8.02 hereof, the Seller may proceed to enforce its rights by
any means permitted by applicable law, including without limitation bringing an
action to enforce payment, for damages and/or for specific performance by the
Purchaser of any of the Purchaser's obligations under this Agreement.
Section 8.02. Purchaser's Obligation to Take Action Against
Defaulting Member. The Purchaser agrees that if the Purchaser defaults on the
payment of any amounts due hereunder and such default is the result of the
default by any Member in making a Quarterly Contribution, then the Purchaser
shall, if the default has not been cured within 30 days of the occurrence
thereof, promptly proceed to exercise the remedies available to it under the
Company Agreement.
ARTICLE IX
CONSEQUENCES OF BREACH OF REPRESENTATIONS
AND WARRANTIES AND COVENANTS
Section 9.01. Consequence of Breach of Representations and Warranties
and Covenants. Except as provided in the next sentence hereof, to the extent
that the Purchaser is damaged from time to time as a result of any breach of, or
inaccuracy in, any representation or warranty contained in Article III hereof or
the breach of any covenant contained in this Agreement the Purchaser may
withhold from any Contingent Payment due hereunder the amount reasonably
determined by the Purchaser to be necessary to recover such damages. All funds
so withheld shall be maintained by the Purchaser in Permitted Interim
Investments (as defined in the Company Agreement) until released to the
appropriate party (together with the earnings thereon) upon final resolution of
the matter (which resolution shall require the approval of a Majority in
Interest of the Members) or as directed by a court of applicable jurisdiction.
In case of a breach of the representation and warranty set forth in Section 3.20
hereof (the "Capacity Warranty"), the amount of each Contingent Payment due
under Section 2.01 (e) shall be reduced thereafter on a permanent basis to 6.7%
as liquidated damages and not as a penalty. The Purchaser and Seller agree that
the sole remedy for any breach of the Capacity Warranty shall be the price
reduction set forth in the immediately preceding sentence.
ARTICLE X
TERMINATION OF AGREEMENT
Section 10.01. Mutual Agreement. This Agreement may be
terminated at any time prior to the Closing by mutual written agreement of the
Purchaser and the Seller.
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Section 10.02. Noncompliance; Nonperformance. This Agreement
may be terminated by written notice by the Purchaser to the Seller or by the
Seller to the Purchaser, without prejudice to the terminating party's rights to
claim damages or other relief, if (i)(A) any of the material terms, covenants or
conditions of this Agreement to be complied with or performed at or before the
Closing by the party to whom notice is addressed shall not have been complied
with or performed by the Closing Date, (B) such noncompliance or nonperformance
shall be such as would entitle the terminating party to decline to consummate
the transaction, and (C) such noncompliance or nonperformance shall not have
been waived by the party giving notice of termination or (ii) the Closing shall
not have occurred on or prior to August 31, 1998.
ARTICLE XI
MISCELLANEOUS
Section 11.01. Entire Agreement. This Agreement (including the
Schedules attached hereto) constitutes the entire agreement and understanding of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings, whether oral or written, relating to the subject
matter hereof.
Section 11.02. Successors and Assigns. This Agreement shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and permitted assigns. This Agreement may not be assigned
by the Purchaser without the prior written consent of the Seller.
Section 11.03. Counterparts; Effectiveness. This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
Section 11.04. Headings. The headings in this Agreement are
included for convenience of reference only and shall not in any way affect the
meaning or interpretation of this Agreement.
Section 11.05. Amendment; Waiver; Requirement of Writing. This
Agreement cannot be amended, changed, modified, released or discharged, and no
performance, term or condition can be waived in whole or in part, except by a
writing signed by the party against whom enforcement of the amendment, change,
modification or waiver is sought. Any term or condition of this Agreement may be
waived at any time by the party hereto entitled to the benefit thereof. No delay
or failure on the part of any party in exercising any rights hereunder, and no
partial or single exercise thereof, will constitute a waiver of such rights or
of any other rights hereunder.
Section 11.06. Notices. Any notice, request, consent, waiver
or other communication required or permitted hereunder shall be effective only
if it is in writing and personally delivered or sent by certified or registered
mail, postage prepaid, by nationally recognized overnight courier or by
telecopier, addressed as set forth below:
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If to the Seller:
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Attention: General Counsel
Facsimile: (801) 768-4483
If to the Purchaser:
Mountaineer Synfuel, L.L.C.
3280 North Frontage Road
Lehi, Utah 84043
Facsimile: (801) 766-1979
with a copy to each Member at the address specified therefor
in the Company Agreement (as amended from time to time).
or such other person or address as the addressee may have specified in a notice
duly given to the sender as provided herein. Such notice or communication shall
be deemed to have been given as of the date received by the recipient thereof.
Section 11.07. Governing Law. This Agreement shall be
construed in accordance with and governed by the laws of the State of Delaware,
without regard to its principles of conflicts of laws.
Section 11.08. Exclusion of Consequential Damages. Neither
party, its Affiliates nor their respective employees, agents or subcontractors
shall be liable to the other party, its Affiliates or their respective
employees, agents or subcontractors, whether based in contract, in tort
(including negligence and strict liability), under warranty, or otherwise, for
any consequential, indirect, punitive, incidental, exemplary or special loss or
damage whatsoever, including without limitation, loss of use, loss of productive
resources, loss of opportunity or anticipated profits, damages to good will or
reputation or punitive or speculative damages. The inclusion of this provision
has been a material inducement for each of the parties to enter into this
Agreement.
Section 11.09. No Third-Party Beneficiaries. Nothing in this
Agreement will be construed as giving any person, firm, corporation or other
entity, other than the parties hereto and their successors and permitted
assigns, any right, remedy or claim under or in respect of this Agreement or any
provision hereof.
Section 11.10. Interim Funding. The Purchaser has concurrently
with the execution and delivery of this Agreement loaned $6,250,000 to the
Seller to be used for the construction and placing in service of the Project on
the terms and conditions of this Agreement. The Purchaser agrees, to provide
working capital for the construction of the Project, to lend the
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further amounts, on the dates, and subject to the conditions set forth on
Exhibit C hereto. The Seller agrees to repay the full amount loaned to it
hereunder on the earlier of the Closing Date or January 1, 1999. To evidence
Seller's obligation to repay that amount, the Seller is concurrently herewith
delivering to the Purchaser its promissory note.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or caused this Agreement to be duly executed by their respective
officers or partners thereunto duly authorized, as of the date first above
written.
MOUNTAINEER SYNFUEL, L.L.C.
By: Covol Technologies, Inc.
Its Manager
By: /s/ Covol Technologies, Inc.
Name: Brent M. Cook
Title: President
COVOL TECHNOLOGIES, INC.
By: /s/ Stanley M. Kimball
Name: Stanley M. Kimball
Title: CFO
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Exhibit A
Mountaineer Synfuels,LLC
Schedule of Operating Results and Cash Flows
Not Attached
Exhibit B
[FORM OF DEFERRED CONTINGENT PAYMENT NOTE]
DEFERRED CONTINGENT PAYMENT NOTE
$50,000,000
Lehi, Utah
,
FOR VALUE RECEIVED, the undersigned, MOUNTAINEER SYNFUEL,
L.L.C., a Delaware limited liability company ("MSLCC"), hereby unconditionally
promises to pay to the order of COVOL TECHNOLOGIES, INC., a Delaware corporation
("Covol"), located at 3280 North Frontage Road, Lehi, Utah 84043, in lawful
money of the United States and in immediately available funds, the principal
amount of $50,000,000, or, if less, the aggregate unpaid Deferred Contingent
Payments due but not paid under the Purchase Agreement (as hereinafter defined),
which sum shall be due and payable from time to time in accordance with Section
2.03 of the Purchase Agreement, and if not repaid earlier, shall be due and
payable and paid to Covol on August 1, 2008. MSLCC further agrees to pay
interest in like money from the date hereof on the unpaid principal amount
hereof from time to time outstanding at the rate of 6% per annum, compounded
annually, until paid.
Capitalized terms used herein without definition have the
meanings assigned to them in the Purchase Agreement.
The holder of this promissory note is authorized to record, on
the schedule annexed hereto and made a part hereof, or on other appropriate
records of Covol, the date and amount of each Contingent Payment deferred
pursuant to Section 2.03 of the Purchase Agreement and the date and amount of
each payment of principal thereof; provided, however, that failure by Covol to
make any recordation or other error therein shall not limit or otherwise affect
the obligations of MSLCC hereunder.
This promissory note is the promissory note referred to in the
Purchase and Sale Agreement, dated May 1, 1998, by and between Mountaineer
Synfuel, L.L.C. and Covol Technologies, Inc. (as the same may be amended,
modified or supplemented from time to time, the "Purchase Agreement"). This
promissory note is entitled to the benefits of the Purchase Agreement.
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The obligation of MSLCC is absolute and unconditional to pay
the principal of and interest on this promissory note at the place, at the
respective times, and in the currency herein prescribed. MSLCC waives any and
all right to assert any defense (other than performance hereunder), set-off,
counterclaim or crossclaim of any nature whatsoever with respect to this
promissory note or the obligations of MSLCC hereunder in any action or
proceeding brought by Covol to collect this promissory note, or any portion
hereof. MSLCC waives presentment, demand, notice, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default or
enforcement of this promissory note.
There shall be full recourse to MSLCC and all of its assets for the
liabilities and obligations of MSLCC under this promissory note and the Purchase
Agreement, but in no event shall any partner of MSLCC, nor any Affiliate
thereof, nor any shareholder, officer, director, employee or agent of any
thereof, be personally liable or obligated for such liabilities and obligations
of MSLCC.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
PROVISIONS THEREOF THAT PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANY
OTHER JURISDICTION.
MOUNTAINEER SYNFUEL, L.L.C.
By: Covol Technologies, Inc.
its Manager
By:
Name:
Title:
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Exhibit C
Interim Funding Draw Schedule
Not Attached
Schedules
3.01 Purchase Assets - Not attached
3.05 Insurance - Not attached
3.06 Commitments - Not attached
3.09 Permits - Not attached
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PROMISSORY NOTE
$9,000,000. May 5, 1998
FOR VALUE RECEIVED, the undersigned, COVOL TECHNOLOGIES, INC.,
a Delaware corporation ("Covol") hereby unconditionally promises to pay to the
order of MOUNTAINEER SYNFUEL, L.L.C., a Delaware limited liability company
("Mountaineer"), in lawful money of the United States and in immediately
available funds, the principal amount of $9,000,000, or, if less, the aggregate
amounts loaned by Mountaineer to Covol as provided in Section 11.10 of the Asset
Purchase Agreement dated May 5, 1998 between Covol and Mountaineer (the "APA"),
which sum shall be due and payable and paid to Mountaineer on the earlier of the
Closing Date (as defined in the APA) or January 1, 1999.
The holder of this promissory note is authorized to record, on
the schedule annexed hereto and made a part hereof, or on other appropriate
records of Mountaineer, the date and amount of each amount loaned by Mountaineer
to Covol under Section 11.10 of the APA; provided, however, that failure by
Mountaineer to make any recordation or other error therein shall not limit or
otherwise affect the obligations of Covol hereunder. This promissory note is the
promissory note referred to in Section 11.10 of the APA.
The obligation of Covol is absolute and unconditional to pay
the principal of this promissory note at the offices of Mountaineer, at the
time, and in the currency herein prescribed. Covol waives any and all right to
assert any defense (other than performance hereunder), set-off, counterclaim or
crossclaim of any nature whatsoever with respect to this promissory note or the
obligations of Covol hereunder in any action or proceeding brought by
Mountaineer to collect this promissory note, or any portion hereof. Covol waives
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this promissory note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
PROVISIONS THEREOF THAT PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANY
OTHER JURISDICTION.
COVOL TECHNOLOGIES, INC.
By:
Name:
Title:
DEED OF GROUND LEASE
THIS DEED OF GROUND LEASE (this "Lease"), dated as of the 5th day of
May, 1998, between UPSHUR PROPERTY, INC., a Delaware corporation (the
"Landlord") and COVOL TECHNOLOGIES, INC., a Delaware corporation (the "Tenant"),
recites and provides:
RECITALS:
The Landlord is the owner of certain coal related property located in
Upshur County, West Virginia, described on Exhibit A attached hereto. The
Landlord wishes to lease the Premises, an approximately ten (10) acre parcel, to
the Tenant for the purposes of Tenant owning and operating a synthetic fuel
manufacturing plant (the "Facility" as defined herein), and the Tenant wishes to
lease the Premises from the Landlord, upon completion of the Facility. The
Tenant intends to own and operate the Facility on the Premises for producing
solid synthetic fuel.
ARTICLE 1
Definitions
The following terms shall have the indicated meanings:
"Adjoining Property" means the property currently owned by the Landlord
adjoining the Premises.
"Covol" means Covol Technologies, Inc., its successors and assigns.
"Easements" means all those access, utility and other easements, rights
of way, licenses and permits which Landlord has the ability to grant to Tenant
and which are reasonably necessary or appropriate (1) for passage of personnel,
materials and equipment to and from the Facility and the Premises, (2) for
construction, operation, maintenance and demolition of the Facility, and (3) for
the provision of utility services to the Premises. To the best of Landlord's
knowledge, Landlord has the
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ability to grant to Tenant such of the foregoing easements as are reasonably
necessary for Tenant's intended use of the Premises and Easements.
"Event of Default" means any of the events described in Section 9.1.
"Facility" means those facilities, buildings, structures and other
improvements located on or to be located upon the Premises for producing
synthetic fuel, using a process patented by Tenant, together with those
facilities, buildings, structures and other improvements also located or to be
located on the Premises, for washing coal and coal fines in preparation for
processing, if any, and all plant equipment, apparatus, machinery and fixtures
of every kind and nature forming part of such facilities, buildings, structures
and other improvements which are the subject of that certain Asset Purchase
Agreement of even date herewith, between Covol and Mountaineer.
"Leased Surface Property" means that certain tract of surface property
identified as the Leased Surface Property on the map attached hereto and made a
part hereof as Exhibit A which may be surveyed by Tenant hereafter.
"Mountaineer" means Mountaineer Synfuel, L.L.C., a Delaware limited
liability company.
"Permitted Encumbrances" means (i) liens and other encumbrances now or
hereafter recorded in the Office of the Clerk of the County Commission of Upshur
County, West Virginia; and (ii) unrecorded rights of way, easements, or
restrictions granted by Landlord to Tenant or to a third party in connection
with the operation of the Facility.
"Premises" means (i) the Leased Surface Property, (ii) the subsurface
of the Leased Surface Property up to and including a depth of five (5) feet, and
(iii) the Easements.
"Rent" means the rental required to be paid pursuant to Section 2.2 and
all other amounts required to be paid hereunder by the Tenant to the Landlord.
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"Taxes" means all personal and real property, rental, excise, gross
receipts, business, occupation and other taxes and assessments of every kind and
nature whatsoever, levied or assessed against the Premises or the Facility, as
well as those taxes arising from the use, occupancy or operation of the Facility
or the activities of the Tenant or any person or entity claiming by, through or
under the Tenant, the non-payment of which would adversely affect the Landlord
or the Premises.
"Term" shall mean, unless terminated earlier pursuant to the terms and
conditions of this Lease, the term described in Section 2.3.
ARTICLE II
Lease of Premises; Rent; Term
Section 2.1 Lease. The Landlord hereby demises and leases the Premises
to the Tenant and the Tenant takes and leases the Premises from the Landlord for
the purpose of Tenant owning and operating the Facility, subject to and in
accordance with the provisions hereof, and together with the further rights and
obligations contained in Section 2.7 hereof. Landlord hereby expressly excepts
and reserves, and the grant of lease set forth in this Section 2.1 above is made
subject to, the right and privilege of Landlord to transport, or permit the
transport of, coal, coal by-products, goods, equipment and personnel over,
across and through the Premises, so long as such use does not unreasonably
interfere with Tenant's use and occupancy of the Premises.
Section 2.2 Rent. Tenant shall pay to the Landlord, as ground rent
hereunder, for each year during the Term, One Thousand Dollars ($1,000) per
annum payable in advance on the tenth day of each such year commencing upon the
Commencement Date.
Section 2.3 Term. Unless sooner terminated as provided herein, the term
of this Lease shall commence on the date hereof (the "Commencement Date") and
shall expire on July 1, 2008 (the "Termination Date") unless extended or
terminated pursuant to the provisions hereof.
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Section 2.4 Quiet Enjoyment. Except as otherwise expressly set forth in
Section 2.1 above, so long as no Event of Default exists hereunder and is
continuing beyond any applicable grace or cure period, the Landlord covenants
that the Tenant shall lawfully and quietly hold, occupy and enjoy the Premises
in accordance with the terms of this Lease, without interference from Landlord
or anyone claiming by or through Landlord. To the best knowledge of Landlord,
Landlord is vested with good and marketable fee simple title to the Premises and
no third party has an interest in the Premises superior to that of Landlord. The
Premises are demised and leased subject to (a) Permitted Encumbrances, (b) all
zoning regulations, restrictions, rules and ordinances, building restrictions
and other laws and regulations now in effect or hereafter adopted by any
governmental authority having jurisdiction over the Premises, and (c) all
federal, state and local laws, rules and regulations directly or indirectly
affecting or relating to the Premises, including, without limitation, permits
relating to the Premises. So long as no Event of Default exists hereunder and is
continuing beyond any applicable grace or cure period, the Landlord covenants
that the Tenant shall enjoy non-exclusive use of the Easements, together with
only Landlord, and Covol if this Lease is assigned by Tenant to a party other
than Covol. Landlord represents and warrants that to the best of its knowledge
none of the Permitted Encumbrances shall adversely interfere with Tenant's use
and enjoyment of the Premises or the Easements. Tenant may, at its expense,
obtain a title insurance policy insuring Tenant's interest in the Premises
pursuant to this Lease, and Landlord agrees to use commercially reasonable
efforts to assist Tenant in the same.
Section 2.5 Ownership of Facility. The Facility shall at all times
remain the property of the Tenant unless Tenant notifies Landlord, at least
three (3) months prior to the expiration of the Term or within ten (10) days
following any other termination, that the Facility shall remain on the Premises
upon the expiration or termination of this Lease and that Tenant does not intend
to relocate the same;
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if Tenant provides such notice, upon such termination or expiration the Facility
shall become the property of Landlord. If Tenant does not give such notice,
Tenant shall remove the Facility from the Premises within six (6) months
following the expiration or termination of this Lease and reclaim the Premises
to the approximate condition that existed immediately before the Facility was
placed on the Premises. All such reclamation shall be in accordance with and to
the extent required by all applicable federal, state and local laws, rules, and
regulations including mining laws. If Tenant fails to remove the Facility within
said six-month period, Tenant shall forfeit any and all rights to the Facility
and the same shall become the property of Landlord. In that event, Landlord
shall have the right, but not the obligation, to remove the Facility and reclaim
the Premises to the approximate condition that existed immediately before the
Facility was placed on the Premises. Tenant shall promptly reimburse Landlord
for all reasonable costs and expenses associated with the removal of the
Facility and reclamation of the Premises.
Section 2.6 Use. The Premises shall be used only for the operation and
maintenance of the Facility and the use thereof in the business of producing
solid synthetic fuel from coal fines and other waste fuel and related
activities. Tenant shall not use the Premises in any way that interferes with or
adversely impacts Landlord's use or occupancy of the Adjoining Property.
Section 2.7 Additional Space. The Rent has been calculated to include
additional rental for, and Landlord hereby agrees to lease to Tenant (at no
additional cost to Tenant except as stated above), additional space which
contains not less than five (5) acres and no more than ten (10) acres, and which
is contiguous to the Premises, for use by Tenant for stockpiles and ancillary
purposes on the terms and conditions substantially similar hereto, the location
of which additional space shall be determined by Tenant with the Landlord's
consent, not to be unreasonably withheld. Such additional space leased to Tenant
shall be considered a part of the Premises for all purposes of this Lease.
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Section 2.8 Removal of Feedstock and Product. Notwithstanding anything
herein to the contrary, upon the cancellation, expiration, or termination of
this Lease, Tenant shall remove all stockpiles of feedstock supplied for the
Facility and all stockpiles of Product produced by the
Facility. ARTICLE III
Taxes, Utilities and Easements
Section 3.1 Taxes. The Tenant shall pay, or cause to be paid, all Taxes
assessed on or relating to the Facility and the Premises on or before the due
date for such Taxes, but excluding any taxes arising from or relating to
Landlord's retained rights with respect to the Premises pursuant to Section 2.1
hereof.
Section 3.2 Utilities. The Tenant shall pay, or cause to be paid, all
costs and expenses required to provide utility service to the Facility
(including all professional and service charges, costs of connections to the
applicable utility systems and charges for the usage of utility services).
ARTICLE IV
Maintenance and Operation of Facility
Section 4.1 Tenant's Duty to Maintain. The Tenant shall be responsible,
at no cost to Landlord, for all maintenance, repair and upkeep as may be
necessary to keep the Premises and the Facility clean, safe and free from
deterioration, except that, to the extent Landlord exercises its right to cross
over the Premises as set forth in Section 2.1 hereof, Landlord shall pay its
proportionate share of such costs. Landlord and Tenant acknowledge that the
location of the Facility may impede Landlord's access (i) to its screening
building or refuse bin by the existing access road and (ii) to the existing
parking for Landlord's preparation plant. Upon Landlord's reasonable request,
Tenant shall, at its expense, provide Landlord (i) access to the Landlord's
screening building or refuse bin through the premises by moving any of Tenant's
improvements impeding the existing road or by building an
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alternate access road; and (ii) parking for Landlord's preparation plant by
either moving Tenant's feedstock stock pile or building a parking area at an
alternate location.
Section 4.2 No Additional Liens or Encumbrances. The Tenant shall not
create or cause to be created any liens or encumbrances of any kind whatsoever
with respect to the Premises. If any lien is filed or threatened to be filed
against the Premises as a result of any act or omission of the Tenant hereunder,
the Tenant shall, upon the written request of the Landlord, cause the same to be
bonded off or released of record at Tenant's election within a reasonable period
of time after the Tenant receives such written request.
Section 4.3 Landlord's Right to Inspect. The Landlord may enter the
Premises and the Facility at any time and for any lawful reason. Landlord shall
provide Tenant with reasonable prior notice of such entry under the
circumstances and if feasible, give a representative of Tenant an opportunity to
be present during such entry.
ARTICLE V
Ownership of Facility
Section 5.1 Title to Facility. Except as otherwise expressly set forth
herein, the Facility shall be owned by Tenant during the Term.
ARTICLE VI
Mortgage of Leasehold
Section 6.1 Right to Mortgage. The Tenant shall not grant, or cause to
be created, any deed of trust or other lien, encumbrance or security interest on
or in all or any part of this Lease or Tenant's interest in the Premises.
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ARTICLE VII
Insurance
Section 7.1 Insurance. The Tenant shall maintain, at its sole cost and
expense, and shall require any contractors, subcontractors, other entities or
individuals it may engage to enter or perform any work on the Premises to
maintain, at all times while on or performing work on the Premises, the
insurance coverages set forth below:
(a) Commercial general public liability and property damage
insurance with each underlying limit being not less than (i) One Million Dollars
($1,000,000) in respect of bodily injury to or death of one person, (ii) Five
Million Dollars ($5,000,000) in respect of bodily injury to or death of more
than one person in any one occurrence, and (iii) One Million Dollars
($1,000,000) in respect of damage to or destruction of property.
(b) Employer's liability insurance protecting against employee
claims for bodily injury, "Mandolidis" actions and all other employee claims
against employers with each underlying limit being not less than One Million
Dollars ($1,000,000) per person and Five Million Dollars ($5,000,000) for each
occurrence.
(c) Fire, property damage and extended coverage for the
Facility and all other buildings and structures on the Premises for the
replacement value of such buildings and structures.
(d) Automobile bodily injury liability insurance in the same
bodily injury liability limits as set forth in Section 7.1(a) above, and
automobile property damage liability insurance in an amount of not less than
Five Hundred Thousand Dollars ($500,000).
(e) Workers' compensation insurance, occupational diseases
insurance, including state and federal black lung coverage, unemployment
compensation and all other insurance coverages for occupational injury, disease
or hazards as required by the laws and regulations
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applicable to and covering employees of Tenant engaged in the
performance of work on the Premises.
(f) Environmental liability insurance with coverage of not
less than Five Million Dollars ($5,000,000).
The Tenant's obligation to obtain the insurance coverages as provided
in this Section 7.1 shall not in any way be construed so as to limit, amend or
otherwise modify its obligation to indemnify Landlord as provided elsewhere in
this Lease.
Section 7.2 Form of Insurance. All insurance coverages required under
Section 7.1 above shall be with a reputable insurer, licensed to do business in
the State of West Virginia, and Landlord shall have the right to approve such
insurer, such approval not to be unreasonably withheld. All policies or
certificates of insurance obtained by Tenant under this Lease shall name
Landlord as an additional insured and shall contain a provision for thirty (30)
days prior notice to Landlord of any proposed cancellation or substantial change
in coverage. Every insurance policy required under Section 7.1 above shall
contain a waiver of subrogation by the insurer against Landlord, its owners,
affiliates and subsidiaries. Each policy of insurance shall be written as an
"occurrence" contract unless the policy is available only on a "claims made"
basis, in which case Tenant shall continue such insurance policy for a period of
two (2) years after the expiration, termination or cancellation of this Lease.
Section 7.3 Proof of Insurance Coverage. The Tenant shall furnish to
Landlord copies of all certificates of insurance relating to the policies which
provide the insurance coverages required by Section 7.1 above, including, but
not limited to, copies of any bonds which may be required for such coverages,
prior to commencing any work on the Premises and thereafter upon request by
Landlord.
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Section 7.4 Payment of Premiums. The Tenant expressly agrees and
acknowledges that its inability, failure, neglect or refusal to carry, maintain
and keep current, at all times during the term of this Lease the insurance
coverages required hereunder and its inability, failure, neglect or refusal to
be and remain at all times during the term of this Lease a subscriber or
self-insurer in good standing with the West Virginia Worker's Compensation Fund,
state and federal black lung funds or any other occupational disease and
disability insurance fund, shall constitute an Event of Default. In addition,
Landlord shall have the right, for and on behalf of Tenant, to pay any premiums
for any insurance required hereunder to maintain such insurance coverage. Tenant
shall reimburse Landlord for all premiums within ten (10) days of Landlord's
request for the same.
ARTICLE VIII
Indemnification of Landlord and Tenant
Section 8.1 Indemnification of Landlord. The Tenant shall indemnify,
hold harmless and defend Landlord, its affiliates and its and their
stockholders, officers, directors, managers, employees and agents from and
against any and all suits, actions, liabilities, demands, losses, claims,
settlements, awards, damages, judgments, costs and expenses of every kind and
nature, including, without limitation, reasonable attorney's fees and related
costs incurred in enforcing this indemnity, arising out of or relating, directly
or indirectly, to any or all of the following: (i) the negligence or willful
misconduct of Tenant, its officers, employees, agents, representatives,
contractors, subcontractors or agents in connection with any of its activities
or operations at the Premises under this Lease, or (ii) a material breach by
Tenant of any covenant, representation, warranty or other term or condition of
this Lease, or (iii) any violation of any federal, state or local law, rule or
regulation by Tenant, including, without limitation, any Environmental Laws (as
hereinafter defined) and from any Hazardous Material (as hereinafter defined)
that exists on or is discharged from the Premises
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other than (a) Hazardous Material that existed on or was discharged from the
Premises prior to the Commencement Date or after the termination, expiration or
cancellation of this Lease, or (b) Hazardous Material from the Adjoining
Property, or (c) Hazardous Material brought onto or in the vicinity of the
Premises or the Adjoining Property by Landlord or an agent thereof. Tenant shall
defend the indemnified party, or, at Tenant's option, pay to have the
indemnified party defended, against all such suits, actions, liabilities,
demands, losses, claims, settlements, awards, damages, or judgments subject to
indemnification hereunder. The foregoing obligations of Tenant to indemnify,
hold harmless and defend Landlord shall be in addition to any other specific
agreements or obligations in other sections of this Lease, and shall survive the
expiration, termination or cancellation of this Lease without limitation.
Section 8.2 Indemnification of Tenant. The Landlord shall indemnify,
hold harmless and defend Tenant, its affiliates and its and their stockholders,
officers, directors, managers, employees and agents from and against any and all
suits, actions, liabilities, demands, losses, claims, settlements, awards,
damages, judgments, costs and expenses of every kind and nature, including,
without limitation, reasonable attorneys' fees and related costs incurred in
enforcing this indemnity, arising out of or relating, directly or indirectly, to
(i) the negligence or willful misconduct of Landlord, its officers, employees,
agents or representatives in connection with any of its activities or operations
on the Premises, including without limitation those contemplated by Section 2.1
hereof, and any of its activities or operations on any Adjoining Property, (ii)
a material breach or default by Landlord of any covenant, representation,
warranty or other term or condition of this Lease, (iii) violations of
Environmental Laws and from any Hazardous Material that existed on or was
discharged from the Premises prior to the Commencement Date or on or from any
Adjoining Property at any time, or (iv) violations of Environmental Laws and
from any Hazardous Material on
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or about the Premises or Adjoining Property which arise from any action or
inaction or Landlord or an agent thereof. Landlord shall defend the indemnified
party, or, at Landlord's option, pay to have the indemnified party defended,
against all such suits, actions, liabilities, demands, losses, claims,
settlements, awards, damages, or judgments subject to indemnification hereunder.
"Hazardous Material" means any hazardous or toxic material, substance or waste
which is defined by those or similar terms or is regulated as such under any
Environmental Laws. "Environmental Laws" means any statute, law, ordinance, rule
or regulation of any local, county, state or federal authority having
jurisdiction over the Premises, the Adjoining Property or any portion thereof or
its use as the same may be amended from time to time, including but not limited
to: (i) the Federal Water Pollution Contract Act (33 U.S.C. Section 1317) as
amended; (ii) the Federal Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.) as amended; (iii) the Comprehensive Environmental Response
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) as amended; (iv)
the Toxic Substance Control Act (15 U.S.C. Section 2601 et seq.) as amended; and
(v) the Clean Air Act (42 U.S.C. Section 7401 et seq.) as amended. The foregoing
obligations of Landlord to indemnify, hold harmless and defend Tenant shall be
in addition to any specific agreements or obligations in other sections of this
Lease, and shall survive the expiration, termination or cancellation of this
Lease without limitation.
ARTICLE IX
Default, Remedies, Waiver
Section 9.1 Default. The occurrence of any of the following shall
constitute an Event of Default:
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(a) Failure to pay Rent when due; provided, however, that no
Event of Default shall occur if the Rent is paid within ten (10) days of
Landlord's written notice to Tenant that Tenant failed to pay the Rent when due.
(b) The failure of the Tenant to observe or perform any
provision of this Lease required to be observed or performed by the Tenant if
such failure continues for thirty (30) days after written notice thereof from
the Landlord to the Tenant; provided, however, that if the default cannot be
cured within such thirty (30) day period, no Event of Default shall be deemed to
exist, for a maximum period of ninety (90) days, if the Tenant shall within such
thirty (30) day period commence such cure and thereafter diligently prosecute
the same to completion.
(c) The Tenant (1) admits in writing its inability to pay its
debts generally as they become due, (2) commences or becomes the subject of an
insolvency proceeding or any similar proceeding for liquidation, reorganization
or arrangement under any bankruptcy or insolvency law in any jurisdiction and
fails to discharge the same within sixty (60) days, (3) makes a general
assignment for the benefit of its creditors, (4) consents to the appointment of
a custodian, receiver, trustee or other officer with similar powers with respect
to itself or with respect to any substantial part of its property, or (5) takes
corporate or comparable action for the purpose of any of the foregoing.
(d) Failure of Tenant to operate the Facility for six (6)
consecutive months.
(e) Abandonment of the Premises by Tenant or relocation
or removal of the Facility from the Premises..
(f) Mountaineer fails to exercise its option to purchase the
Facility and to require Tenant to assign this Lease to Mountaineer prior to
September 1, 1998.
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Section 9.2 Remedies Upon Default. Upon an Event of Default, the
Landlord, without further notice to the Tenant, shall have each of the following
remedies at the Landlord's election:
(a) Without barring later election of any other remedy and
without terminating the Tenant's right to possession of the Premises, the
Landlord may require strict performance of all covenants and obligations herein
as the same shall accrue or become due.
(b) The Landlord may, at the Landlord's election, terminate
this Lease by giving the Tenant written notice of termination. Upon the giving
of such notice, subject to the Tenant's rights under Section 2.5 hereof, all of
the Tenant's rights in the Premises shall terminate except Tenant's rights to
remove the Facility as set forth herein. Promptly after notice of termination,
subject to Section 2.5 hereof, the Tenant shall surrender and vacate the
Premises as set forth in Section 2.5 hereof. Termination hereunder shall not
relieve the Tenant of any obligation under the Lease or from any claim for
damages previously accrued or then accruing against the Tenant.
(c) The Landlord shall have the right but not the obligation
to perform any obligation hereunder that the Tenant fails to perform (after
notice and expiration of the applicable cure period referenced above) at the
cost and expense of the Tenant. The Tenant shall immediately reimburse the
Landlord for all such costs and expenses (including reasonable attorneys' fees
and related legal expenses) incurred by the Landlord.
(d) If this Lease is terminated, the Landlord shall be
entitled to collect all Rent which is due and owing as of the termination date
of the Lease but not any accelerated or future Rent, and Landlord shall be
entitled to its reasonable attorneys' fees in connection with collecting the
same.
Section 9.3 Equitable Relief. Nothing contained herein shall affect,
change or waive any rights of the Landlord to obtain equitable relief.
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Section 9.4 Cumulative Remedies. The remedies of the Landlord hereunder
are cumulative and in addition to, rather than exclusive of, any other remedy of
the Landlord herein given or that may be permitted by law. Any reentry as
provided for herein shall not make the Landlord liable in damages or guilty of
trespass because of any such reentry.
Section 9.5 No Waiver. No waiver by the Landlord at any time of any of
the terms, conditions, covenants or agreements of this Lease shall be deemed or
taken as a waiver at any time thereafter of the same or any other term,
condition, covenant or agreement herein contained, nor of the strict and prompt
performance thereof by the Tenant. No delay, failure or omission of the Landlord
to reenter the Project or to exercise any right, power, privilege, remedy or
option arising from any Event of Default shall impair any such right, power,
privilege, remedy or option, or as a relinquishment thereof, or acquiescence in
such Event of Default. No right, power, privilege, remedy or option of the
Landlord shall be construed as being exhausted or discharged by the exercise
thereof in one or more instances. Each and all of the rights, powers,
privileges, remedies and options given to the Landlord by this Lease are
cumulative and no one of them is exclusive of the other or exclusive of any
remedies provided by any applicable law.
Section 9.6 Investor Cure Rights. Notwithstanding anything herein to
the contrary, following any assignment by Tenant of its rights under this Lease
to Mountaineer, and provided notice of the same has been given to Landlord, no
Event of Default shall exist hereunder until Landlord has notified each investor
in Mountaineer whose identity and mailing address have been given to Landlord,
and such parties have failed to cure (or cause Mountaineer to cure) the action
or inaction which would result in such Event of Default within twenty (20) days
or such longer period as Tenant has or would have in which to cure such action
or inaction.
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ARTICLE X
Landlord's Default
The Landlord's failure to perform or observe any of its Lease
obligations shall constitute a Landlord event of default ("Landlord Default")
under this Lease. The Tenant shall notify the Landlord of all Landlord Defaults
and the Landlord shall have thirty (30) days from its receipt of such notice to
cure (or, if a Landlord Default cannot reasonable be cured within such
thirty-day period, to commence and prosecute a good faith effort to cure the
Landlord Default, with such extended cure period not to exceed ninety (90)
days). Upon notice to Landlord by the Tenant of the occurrence of a Landlord
Default and the failure of Landlord to cure such Landlord Default within the
applicable notice and cure period, Tenant may, in addition to all other rights
and remedies provided in this Lease, at law or in equity: (a) terminate this
Lease and recover all damages to which the Tenant is entitled under law, or (b)
cure the Landlord Default at the Landlord's expense, including with respect to
reasonable attorneys' fees incurred by Tenant in connection therewith. No delay
by Tenant in the enforcement of the provisions of this Lease shall constitute a
waiver of any Landlord Default and the pursuit by Tenant of one or more remedies
shall not constitute an election of remedies to the exclusion of any other
remedy. Notwithstanding the foregoing, any breach of Section 2.4 by Landlord
shall constitute an immediate Landlord Default.
ARTICLE XI
Assignment and Subletting
Section 11.1 Assignment and Subletting. The parties acknowledge that
Covol is building the Facility for sale to (and with financing provided by)
Mountaineer, and that by an Asset Purchase Agreement of even date herewith,
Covol is granting to Mountaineer an option to acquire the Facility (and Covol's
leasehold hereunder) following completion of construction. Accordingly, the
parties
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agree that Covol may freely assign this Lease at any time to Mountaineer;
provided that Mountaineer executes and delivers to Landlord an agreement
assuming all of the obligations of Tenant hereunder. Other than with respect to
the foregoing, the Tenant may not assign this Lease (or any portion thereof),
sublease the Premises (or any portion thereof) or lease the Facility (or any
portion thereof) without the prior written consent of the Landlord, which
consent may not be unreasonably withheld.
ARTICLE XII
Condemnation
Section 12.1 Full Taking. If all or substantially all of the Facility
is taken as a result of the exercise of the power of eminent domain, this Lease
shall terminate as of the effective date of the taking. For purposes of this
Section 12.1, "substantially all of the Facility" shall be deemed to have been
taken if the untaken portion cannot be practically and economically used or
converted for use by Tenant as contemplated by this Lease, in Tenant's
reasonable judgment. Upon the occurrence of a full taking, the Landlord is
entitled to receive and retain the entire award, except as hereinafter set out
in Section 12.3. The termination of this Lease will not affect the right to this
award. In the event of a full taking, Tenant's obligation to pay Rent and
additional rent will be abated during the unexpired portion of this Lease,
effective as of the date the condemning authority takes the Premises.
Section 12.2 Partial Taking. If less than substantially all of the
Premises is taken as a result of the exercise of the power of eminent domain,
and if the Premises can at a reasonable expense (not to exceed any condemnation
award allocated with respect thereto) be repaired, restored or replaced, and is
sufficient for Tenant's purposes in Tenant's reasonable judgment, this Lease
shall not terminate but shall continue in full force and effect for the
remainder of the Term.
Section 12.3 Compensation for Personal Property and Relocation
Expenses. Tenant shall have the right to claim and recover from the condemning
authority any such compensation as may
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<PAGE>
be awarded to Tenant for the value of the Facility, furniture, equipment and
other personal property owned by Tenant, removal of merchandise, moving and
relocation expenses, and damage to Tenant's business conducted at the Premises.
ARTICLE XIII
Miscellaneous
Section 13.1 Tenant's Option to Renew. So long as an Event of Default
is not then continuing beyond any applicable grace or cure period, Tenant shall
have the option to renew this Lease from year to year (but in any event not more
than five (5) such annual renewals) upon all the same terms and conditions
contained herein, including, without limitation, rent; provided, that Tenant
shall give Landlord written notice of its intent to exercise any such annual
renewal at least three (3) months prior to the expiration of the initial term or
any renewal term, as the case may be.
Section 13.2 Estoppel Certificates. The Landlord or the Tenant, upon
written request from the other, shall execute, acknowledge and deliver to the
other, a certificate stating (a) that this Lease is unmodified and in full force
and effect (or, if there have been modifications, that this Lease is in full
force and effect as modified and stating the modifications), (b) the dates, if
any, by which obligations hereunder have been satisfied, (c) that , to the
knowledge of the certifying party, there are no existing offsets or defenses
against the enforcement of any term hereof (or, if so, specifying the same), (d)
that no notice has been given to the Landlord or the Tenant of any default
hereunder which with the giving of notice or the passage of time or both would
constitute an Event of Default, or a Landlord Default, and (e) such other
matters as may be reasonably requested.
Section 13.3 Binding Effect. The provisions of this Lease shall bind
and benefit the heirs, executors, administrators, successors and permitted
assigns of the parties hereto.
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Section 13.4 Memorandum or Short Form of Lease. Concurrently with the
execution of this Lease, the parties hereto shall execute and acknowledge a
memorandum or short form of lease for the purpose of recording the same in the
Office of the Clerk of the County Commission of Upshur County, West Virginia.
The expense of recordation shall be borne by the party requesting such
recordation. Upon a termination of this Lease for any reason, both the Landlord
and the Tenant shall execute a document, in recordable form, confirming that
this Lease is null and void.
Section 13.5 Notices. Any notice required or permitted to be given
hereunder shall be in writing and shall be deemed properly given when delivered
in person to the party to be notified, by registered or certified mail postage
prepaid and return receipt requested by overnight courier, or by facsimile, and
shall be deemed to have been duly given, when delivered by hand or by overnight
courier, five (5) days after deposit in the mail, or when confirmation of the
receipt of the facsimile is received, as the case may be, and addressed as
follows:
If to Landlord: Upshur Property, Inc.
HC 61, Box 31
Tallmansville, West Virginia 26237
Attention: President
Facsimile Number: (304) 472-9257
with a copy to: Upshur Property, Inc.
2708 Cranberry Square
Morgantown, West Virginia 26505
Attention: Treasurer
Facsimile Number: (304) 594-1685
If to Tenant: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Attention: President
Facsimile Number: (801) 768-4483
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<PAGE>
with a copy to: Mountaineer Synfuel, L.L.C.
3280 North Frontage Road
Lehi, Utah 84043
Attention: Manager
Facsimile Number: (801) 766-1979
Section 13.6 Captions. The captions used herein are for convenience
only, are not a part of this Lease and do not in any way limit or amplify the
terms and provisions hereof. The words "herein," "hereof" and "hereunder" and
other words of similar import shall refer to this Lease as a whole and not a
particular Article, Section, Subsection or Paragraph.
Section 13.7 Governing Law; Interpretation. This Lease shall be
interpreted in accordance with and governed by the laws of the State of West
Virginia, without regard to principles of conflicts of laws. The language in all
parts of this Lease shall be interpreted according to its fair meaning and not
more strictly for or against the Landlord or Tenant.
Section 13.8 Entire Agreement. This Lease contains all covenants,
terms, provisions, and agreements between the Landlord and the Tenant relating
in any manner to the demise of the Premises or the rental, use and occupancy of
the same and other matters set forth in this Lease. No prior agreement or
understanding with respect to the same shall be valid or of any force or effect,
and no covenant, term, provision or agreement of this Lease may be altered,
changed, modified or deleted, except in a writing signed by the Landlord and the
Tenant. No representation, inducement, understanding or anything of any nature
whatsoever made, stated or represented on behalf of either party hereto, either
orally or in writing, has induced the other party to enter into this Lease,
except as expressly set forth in this Lease.
Section 13.9 Survival. All covenants which, by their terms, are not to
be performed before the expiration of the term or earlier termination of this
Lease shall survive such expiration or earlier termination.
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<PAGE>
Section 13.10 Counterparts. This Lease may be executed in counterparts,
and if executed in counterparts, each such counterpart shall constitute one and
the same instrument.
Section 13.11 No Third-Party Beneficiaries. The provisions of this
Lease shall not give rise to any third-party beneficiary rights in any person or
entity other than the parties hereto.
Section 13.12 Incorporation of Exhibit. The Exhibit attached hereto is
hereby incorporated into this Lease and made a part hereof.
Section 13.13 Severability. If any provision of this Lease, or the
application thereof to any person or circumstance, shall to any extent be held
to be invalid or unenforceable, the remainder of this Lease and the application
of such provision to other person or circumstances shall not be affected
thereby.
Section 13.14 No Partnership. This Lease does not and shall not be
construed to create a partnership, joint venture or any other relationship
between the parties hereto except the relationship of lessor and lessee.
Section 13.15 Landlord's Lien. Except as may be expressly provided
herein, Landlord hereby subordinates any lien or interest Landlord may have in
any personal property of Tenant or any subtenant, assignee, licensee, or
concessionaire of Tenant, including but not limited to any inventory, machinery,
equipment, and trade fixtures of Tenant or any subtenant, assignee, licensee, or
concessionaire of Tenant, that may from time to time be located at or upon the
Leased Premises, to any and all purchase money financing of such property by
Tenant.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed by their duly authorized representative the day and year first above
written.
UPSHUR PROPERTY, INC.
a Delaware corporation
By: /s/ B. Judd Hartman
Name: B. Judd Hartman
Its: Secretary
COVOL TECHNOLOGIES, INC.
a Delaware corporation
By: /s/ Harlan M. Hatfield
Name: Harlan M. Hatfield
Its: Vice President
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<PAGE>
EXHIBIT A
Drawing of Leased Surface Property
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- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YAR ENDED SEPTEBER 30, 1997 AND
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1998, AND
IS QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,352,585
<SECURITIES> 0
<RECEIVABLES> 3,994,488
<ALLOWANCES> 0
<INVENTORY> 1,272,549
<CURRENT-ASSETS> 11,591,350
<PP&E> 41,265,678
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,049,655
<CURRENT-LIABILITIES> 20,621,891
<BONDS> 0
0
316
<COMMON> 10,561
<OTHER-SE> 19,608,308
<TOTAL-LIABILITY-AND-EQUITY> 65,049,655
<SALES> 0
<TOTAL-REVENUES> 12,352,035
<CGS> 6,678,046
<TOTAL-COSTS> 9,600,544
<OTHER-EXPENSES> (1,429,492)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,292,432
<INCOME-PRETAX> 1,429,492
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,429,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,429,492
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
